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Brazil suffers poor year but outlook for 2013 is better

    CPD
    Approx.0min

    The Brazilian economy in 2012 has been weak by emerging market standards, reflecting the poor economic performance of some of its key export partners.

    At some points during 2012 it has barely grown at all, though it has showed some renewed vigour towards the end of the year as lower interest rates and stimulus measures have started to have an impact.

    Growth was particularly sluggish in the first half of the year. It registered a rise of just 0.2 per cent year on year in the first quarter and 0.5 per cent in the second. This was well behind analysts’ expectations in both cases and the worst performance since 2009.

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    To some extent, growth has been deliberately slowed by the government through higher interest rates to cool Brazil’s ‘hot’ economy and stem fund flows into the country. Brazil’s economy had grown 7.5 per cent in 2010 and had left the country nursing a credit problem.

    But the European debt crisis also played an important part in denting economic growth - Europe remains one of Brazil’s key export markets - and weak demand from China also hurt. There were also some structural problems in Brazil that constrained growth - high taxes, poor infrastructure, excessive bureaucracy.

    The first measure to address these problems was to bring down interest rates. This also had the effect of weakening the currency.

    Jerome Booth, head of research at Ashmore Investment Management, says: “Brazil started its interest rate cutting cycle a year ago, well ahead of the curve. It has been going through a cyclical downturn. Nothing on the scale of what is happening in the west, but a regular normal business cycle. Interest rates are now at 7.25 per cent, the lowest in modern history and growth is picking up as a result. There has been very successful management of the business cycle.”

    In August, the government announced the first phase of a major economy stimulus package, designed to boost growth. It said roughly $60bn (£37.4bn) will be invested in the country’s roads and railways over the next 25 years, with the lion’s share coming in the next five years. It also plans to invest in ports and airports.

    Sebastian Luparia, manager of the JP Morgan Brazil investment trust, says that this infrastructure building will be a vital part in promoting economic growth in the future. Growth has been substantially constrained by lack of strong infrastructure and he believes that the government is finally waking up to its potential: “It is a sign that the government is finally getting to grips with some of the structural issues in the economy.”

    Finally, this stimulus appears to be working, after the economy had seemed impervious for some time. The government expects third quarter growth to be more than 5 per cent in annualised terms, compared to 1.6 per cent for the second quarter. The consumer has finally come to the government’s rescue, buying white goods and cars - auto sales jumped 15.3 per cent in August to hit record highs.