Brazilian Economy Fails to Recover

After expanding meager 0.2 percent in the first quarter of 2014, the Brazilian economy is likely to contract from April to June. While high inflation and interest rate keep on constraining household consumption, strong rise in production costs hampers investments.

Fixed investment fell from a peak of 19.5 percent of GDP in 2009 to 17.7 percent in 2013, reaching one of the lowest levels in Latin America. And they are likely to decline even further in 2014 as production costs are raising. So far, in Q1 of 2014, the cost of working capital increased by 10.9 percent, energy by 3.3 percent and labor by 2.8 percent. In addition, business confidence is deteriorating rapidly. In July, the Industrial Entrepreneur Confidence Index (ICEI) reached the lowest level ever recorded pointing to further contraction in industrial production in the months ahead. 

To make things even worst, in July consumer confidence reached the lowest level since 2005. Although the unemployment rate is low, job prospects are deterioratin and high inflation and interest rates are discouraging spending. In Q1 of 2014, consumer spending contracted 0.77 percent after increasing for 19 quarters in a row. Also, retail sales have been much below levels recorded in 2011 and 2012. 

The government is doing what it can to boost the growth. In the first half of 2014, government spending has been increasing on average 11 percent each month compared to a year earlier. In addition, on July 25th, the Central Bank announced new measures to boost credit operations supply by up to USD 14 billion. Yet, it may be not enough to save the economy since the credit demand is low due to falling business and consumer confidence.

Brazilian Economy Fails to Recover

Pedro Nogueira |
8/4/2014 9:50:35 PM