Brazil’s economy Stalled: A long-awaited recovery still fails to materialise

FOR many months Guido Mantega, Brazil’s finance minister, has been forecasting that the economy is on the verge of vigorous growth that never seems to come. Even so, the third-quarter figures published on November 30th were a shock. The government had convinced independent economists that a weaker currency, lower interest rates, and a cut in sales tax on cars and white goods would prompt a healthy expansion of 1.2% compared with the previous quarter. In the event, the figure was just 0.6%. The national statistics institute also slashed its estimate of second-quarter growth, from 0.4% to 0.2%.


The numbers were “disappointing”, admitted Mr Mantega. But recovery, he insisted, is on the way: 4% growth will come next year, with 5% in 2014. Few now believe him. Analysts are slashing their predictions (see chart). Add last year’s anaemic 2.7% and Brazil is seeing its worst growth performance in over a decade.

The nastiest surprise was the fall in investment, despite the government’s efforts to lower business costs. The Central Bank has reduced the policy interest rate from 12.5% in mid-2011 to a record low of 7.25%; it has also pushed state banks to cut spreads and to lend more. A tax on foreign-currency inflows and the Central Bank’s interventions have engineered a fall in the painfully strong real of around 20% since February. The government has cut payroll taxes for manufacturers, promises a big cut in electricity tariffs, and has turned to the private sector to ease transport congestion.

All this reads like a Brazilian businessman’s dream come true. So why has the hoped-for investment boom not materialised? The government’s high-handed approach and hostile attitude towards the private sector seem to have put off the very investors it hoped to attract. Brazil’s electricity prices, for example, are the world’s third-highest and a long-standing business bugbear. But the government’s plan to cut tariffs by 20% risks misfiring because it overestimated utility firms’ margins and underestimated the rate of return they would require to renew contracts early.

Some firms have decided not to sign up, even though that means they will probably lose their concessions when they expire. Eletrobras, a state-controlled giant, bowed to the government’s wishes over those of minority shareholders—and saw its share price plummet. “I fail to see how destroying shareholder value helps to attract investment,” says Tony Volpon of Nomura Securities, a broker.

Services, long the main source of new jobs, have stalled too. Financial services were hit by higher defaults, fewer loans and tighter profit margins. But the slowdown goes wider, says Silvia Matos of the Fundaçao Getúlio Vargas, a university. Past sources of productivity gains, such as easier registration for small companies and greater access to credit, have run their course, she says.

The only good news for the government was that consumption by households is still growing, albeit at a slower pace than in the recent past. That, and keeping inflation under control, are the recipe for political popularity in Brazil. Dilma Rousseff, the president, is indeed popular. More than three-quarters of respondents in opinion polls rate her as “good” or “excellent”. One poll last month found that 26% spontaneously named her as their preferred presidential candidate in 2014—for the first time, more than cited her predecessor and mentor, Luiz Inácio Lula da Silva. Until recently she looked like a shoo-in for a second term.

But Ms Rousseff’s likeliest opponents have taken the confirmation of the economy’s continuing weakness as the starting gun for the presidential campaign. Eduardo Campos, governor of Pernambuco, a fast-growing north-eastern state, has been sounding statesmanlike on the importance of not putting off potential investors. A meeting on December 3rd of mayors from the Party of Brazilian Social Democracy, the biggest opposition group, turned into an impromptu coronation of Aécio Neves, a senator and former governor of Minas Gerais, Brazil’s third-richest state, as the party’s next leader and presidential candidate.

The following day Mr Neves spoke in the Senate about the “recklessness and folly” of the government’s actions in the electricity sector. Admittedly, one of the refusenik electricity companies is CEMIG, in which Minas Gerais’s government has a big stake. But unless Mr Mantega is finally vindicated and growth picks up soon, the economy will offer Ms Rousseff’s rivals an easy target.