The Brazilian economy has slowed markedly from the strong growth rates seen earlier in the year.
It is expected to rebound, however, as income gains and resilient credit expansion sustain private consumption. Massive infrastructure projects should help lift growth rates anew in the coming years.
Inflation is projected to hover above the target mid-point of 4.5% over the next two years, as labour markets remain tight and the price effects of the recent significant currency appreciation dissipate.
The central bank has stopped the monetary tightening cycle initiated in the spring and has intervened to prevent further strengthening of the real. The remaining monetary stimulus injected during the global crisis should now be rapidly withdrawn to damp rising inflationary pressures. Public consumption swelled ahead of the presidential election. Given the country’s position in the business cycle, fiscal stimulus should be withdrawn as soon as possible. Improved predictability of fiscal arrangements would also be helpful.
Activity has temporarily slowed
Economic growth has been decelerating since the second quarter of the year, reflecting the withdrawal of some fiscal stimulus and monetary tightening. Domestic demand has been the main engine of growth, while export volumes have continued to grow at only a weak pace, partly due to the effective appreciation of the real. Short-term indicators are mixed. On the supply side, output and new orders in the manufacturing sector suggest further weakness in the second half of the year, despite robust growth in capital goods output. At the same time, formal employment has been growing rapidly, particularly in the construction sector, and the unemployment rate has continued to fall. Credit growth and confidence remain resilient, which, together with increases in job creation and real wages resulting in part from sizable gains in the terms of trade, should support consumption.
Brazil
1. Includes stockbuilding and statistical discrepancy.
Source: Central Bank of Brazil, IBGE and FUNCEX.
1 2 http://dx.doi.org/10.1787/888932346192
2006 2007 2008 2009 2010
-4 -2 0 2 4 %
Domestic demand¹ Net exports GDP
Growth has moderated
Contribution to quarterly growth, seasonally adjusted
2006 2007 2008 2009 2010 95
105 115 125 135 145 Index 2005 = 100
Terms of trade (goods and services) Nominal effective exchange rate
The real has appreciated
Massive capital inflows have strengthened the real
The recent capitalisation programme of the state-owned oil company, Petrobras, estimated at around USD 67 billion, attracted considerable foreign capital. This has put upward pressure on the exchange rate but also helped to finance the widening current account deficit, which has been driven by significantly stronger growth in Brazil than elsewhere. Looking ahead, capital inflows may increase the exposure of the economy to volatile short-term investments and to changes in global risk appetites. On the debt front, total external liabilities (at 11.9%
of GDP in June) have remained broadly stable since the beginning of the year, but the share of short-term borrowing has increased significantly.
The authorities have intervened several times since mid-September to remove the excess liquidity resulting from the Petrobras capitalisation programme and smooth its impact on the currency. Foreign-exchange reserves have therefore been rising, reaching USD 276 billion in September. The tax rate on foreign fixed-income investments has been raised twice to 6% to curb short-term capital inflows. Interventions and 1 2 http://dx.doi.org/10.1787/888932347940
Brazil: Macroeconomic indicators
2008 2009 2010 2011 2012
Real GDP growth 5.1 -0.2 7.5 4.3 5.0
Inflation (CPI) 5.9 4.3 5.6 5.3 5.1
Fiscal balance (per cent of GDP)1 -1.9 -3.3 -0.9 -0.5 -0.4 Primary fiscal balance (per cent of GDP)1 3.5 2.1 3.3 3.1 2.7 Current account balance (per cent of GDP) -1.7 -1.5 -2.6 -3.2 -4.0 Note: Real GDP growth and inflation are defined in percentage change from the previous period.
1. Takes into account a capital injection (0.5% of GDP) in the Brazilian Sovereign Wealth Fund in 2008, which was treated as expenditure, and excludes Petrobras from the government accounts.
Source: OECD Economic Outlook 88 database.
Brazil
1. Year-on-year growth.
Source: Central Bank of Brazil and IBGE.
1 2 http://dx.doi.org/10.1787/888932346211
2006 2007 2008 2009 2010
6 7 8 9 10 11 12 %
-1 0 1 2 3 4 5
%
Employment¹ Unemployment rate
The labour market is tight
2006 2007 2008 2009 2010
0 2 4 6 8 10 %
8 10 12 14 16 18 20
%, per year
Tolerance band
Consumer prices (IPCA)¹ SELIC rate
Monetary policy normalisation has paused
taxing capital inflows to limit the currency appreciation may prove ineffective and costly in the context of a rise in the real equilibrium exchange rate due to the oil discoveries.
Monetary policy has been put on hold
The central bank has maintained its policy rate at 10.75% since June 2010, in a context of rising global uncertainties, its lower estimate of the neutral policy interest rate and a substantial rise in the real. The deceleration in economic activity, declines in food prices and the significant appreciation of the currency have helped to contain inflation.
But these effects are expected to be short-lived, especially as rising food prices may push up headline inflation and the damping effect of the exchange-rate rise will dissipate. Inflation expectations have edged up above the central bank’s target range mid-point. Capacity utilisation in the manufacturing industry has remained above its long-term average.
Trend labour productivity growth has been declining, and the low unemployment rate has started to exert upward pressure on wages.
Monetary tightening should resume as soon as possible to quell mounting inflationary pressures.
Budget targets have slipped Despite stronger tax collection, the fiscal surplus was lower than initially envisaged for the first eight months of 2010, as public spending (in particular investment in infrastructure) surged ahead of the October presidential election. The central government cut the January-August primary-balance target by BRL 10 billion from 40 billion, and it is widely expected that the end-year target will be missed, unless accounting adjustments are made.
Fiscal stimulus should be entirely withdrawn
The projection assumes a somewhat slower pace of infrastructure investment spending than the BRL 960 billion (around 40% of GDP) announced by the government for the period 2011-14 during the second phase of the Growth Acceleration Programme (PAC). Although PAC disbursements have accelerated lately, bottlenecks confronting capital 1 2 http://dx.doi.org/10.1787/888932347959
Brazil: External indicators
2008 2009 2010 2011 2012
$ billion
Goods and services exports 227.1 178.2 236.7 291 332
Goods and services imports 224.1 180.2 258.7 329 398
Foreign balance 3.1 - 2.0 - 22.0 - 38 - 66
Invisibles, net - 31.3 - 22.3 - 30.7 - 38 - 41
Current account balance - 28.2 - 24.3 - 52.7 - 76 - 107
Percentage changes
Goods and services export volumes - 0.8 - 10.3 7.2 3.1 8.0 Goods and services import volumes 18.0 - 11.5 33.7 11.5 14.7
Terms of trade 6.9 - 3.3 14.9 4.4 0.2
Source: OECD Economic Outlook 88 database.
spending are still likely to slow programme execution. It is expected that the government will miss its BRL 125 billion target for the primary balance in 2011 and 2012, but some of the resources used to finance infrastructure programmes will be excluded from the primary balance, as is legislatively possible. In this regard, improving the predictability of the government’s decisions with regard to adjustments to the primary balance would raise the credibility of the commitment to achieve fiscal targets. In addition, as recurrent spending is likely to weigh on public finances in the long run, the authorities need to withdraw discretionary stimulus introduced in response to the global downturn. Doing so would also ease inflationary pressures, which would otherwise require additional interest rate hikes.
Activity is expected to bounce back soon
The slowdown in activity is projected to be temporary. Domestic demand is set to rebound by year-end, as improving labour and credit-market conditions spur private consumption. A recovery in investment should be supported by improving growth prospects, sustained credit growth, increased capacity utilisation and large public infrastructure and energy development projects. Inflation could diminish slightly but is likely to remain above the mid-point of the target range. The current account deficit is expected to gradually widen due to the strength in domestic demand, and the deficit could reach almost 4% of GDP in 2012.
The main risks to the outlook are external
The Brazilian economy remains vulnerable to slower growth in China and in OECD countries and to shifts in global risk appetites. Inflation could also prove to be higher than expected, especially if the currency is prevented from appreciating and commodity prices continue to rise. In such a scenario tighter stabilisation policies would be required to ensure that inflation expectations remain anchored. Also putting pressure on inflation, while boosting demand, spending on infrastructure projects could be faster than envisaged. A continuous fall in the unemployment rate could boost labour income and offset the effect of monetary tightening on private consumption.