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16 Aug 2013

Brazil: no reforms, no recovery

Andre Loes

by Andre Loes

Chief Economist for Latin America, HSBC

Brazil: no reforms, no recovery (Getty Images/Cesar Okada)

There is a broad consensus that improving Brazil’s infrastructure is necessary to achieve higher sustained growth

Brazil’s GDP grew by an impressive 7.5 per cent in 2010 but we see no return soon to that, or even to levels healthier than today’s low growth. The economy cannot bounce back without addressing important short-term policy issues and at least pointing in the direction of underlying structural reforms.

However, the government’s loss of political support has dashed hopes of change in the near future and, with presidential elections scheduled for October 2014, momentum for reform may take time to build up. We have thus cut our growth expectations for 2013 and 2014.

Although there is a direct impact from China’s growth downgrade and concerns over the effect that withdrawing US quantitative easing would have on Brazil’s current growth struggle, we believe the country’s disappointing growth record stems mainly from a failure to use its boom years to improve competitiveness.

There is a broad consensus that improving Brazil’s dismal infrastructure is necessary to achieve higher sustained growth but, so far, policies have failed to attract sufficient private-sector interest. Direct state spending, or using public banks to provide subsidised lending funded by the Treasury, has not been enough and is reaching its financial limits.

The current sharp decline of expectations comes at a moment when the economy was
already weak

The June 2013 street protests were the final straw in terms of growth expectations. They have put politics back centre stage, with negative implications on consumer and business confidence in the short term.

Ironically, the protesters demanded many changes that could restore growth, particularly with regard to reforming the public sector, improving public services and generally enhancing the business environment.

However, the deterioration of the political environment and consumer and business confidence will make progress on reforms more difficult from now until the October 2014 presidential and general election, increasing the probability that Brazil keeps delivering lacklustre growth, despite the 2014 FIFA World Cup.

The current sharp decline of expectations comes at a moment when the economy was already weak. As a result, we see a softer jobs market and consumer retrenchment unfolding. This has led us to lower our forecast for real GDP growth in 2013 from 2.4 per cent to 1.9 per cent and for 2014, from 3.0 per cent to 2.2 per cent.

It is important to mention, though, that an agenda of short and medium-term measures could help support the recovery of confidence, push economic growth closer to 3 per cent (with stable inflation), and provide the basis for the increased productivity that would allow Brazil to deliver a higher sustained growth.

This research was first published on 11 August 2013.
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