Brazil Reacts to Slow Economic Growth

By Ben Tavener, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – Figures recently released show Brazil’s economy barely grew in the first quarter of 2012, with shallow growth in the service sector and dismal results from the agriculture industry. Experts are warning that the slowdown of the economy requires new strategies beyond credit-led growth to improve.

President Dilma Rousseff called a ministerial meeting on Tuesday, 29th of May, to discuss Brazil’s latest GDP (Gross Domestic Product) figures, which were released by the IBGE (Brazilian Institute of Geography and Statistics) last week.

The results showed the economy expanded only 0.2 percent compared to the fourth quarter of 2011, or 0.8 percent year-on-year, and appears to continue a more general trend of cooler growth.

The industry sector has performed best, growing 1.7 percent on the previous quarter and driving what little growth there has been.

Although the services sector grew only 0.6 percent on the previous quarter, agriculture and livestock performed dismally, with negative growth of -7.3 percent.

Some blame a poor soy bean harvest due to droughts in Brazil’s South and Northeast regions, which also affected rice and tobacco crops, but also a lack of demand for commodities from Brazil’s biggest business partner, China, as well as ongoing uncertainty from the Eurozone.

The disappointing figures led to a near two percent drop in Brazil’s main stock market, the Bovespa, which is already down five percentage points this year. The figures also showed that investments and exports in Brazil were down markedly, and that government spending had increased.

In response to the news, President Rousseff said that current investment in infrastructure projects around Brazil would lead to growth, and Finance Minister Guido Mantega was equally positive, praising the industry sector results and promising the next quarter’s GDP results would be better:

“We will arrive at the next quarter with the measures taken to stimulate the economy taking effect – more abundant credit, more working capital for companies, more credit for Brazilian consumers,” Mantega said, predicting growth for the whole year at between four and 4.5 percent.

However, most economists are predicting something between 2.5 and three percent. Professor Rogério Mori at the School of Economics at FGV-SP says: “This lower growth reflects domestic consumption which is relatively stagnated, which follows from the fact that Brazilian families are in a lot of debt, relatively speaking.”

Economists are calling for more steps to be taken to boost Brazil’s industry capabilities, such as readjusting the cost of borrowing and the rate of taxation, providing cheaper electricity and gas and more reliable infrastructure, which they say are vital to getting the Brazilian economy back to sustained growth.

The economic expansion that Brazil has experienced has traditionally relied heavily on increased spending by the country’s swelling middle class, which is being driven further by cuts to interest rates and the cost of borrowing. But many say Brazilians have borrowed too much and now own things they cannot, and should not have been able to afford.

Brazil appears to be falling behind its fellow BRICS countries of emerging economies, and investors are concerned that, without a new strategy, the momentum behind some of Brazil’s fastest-growing sectors might falter. Also concerning are issues with the housing market that may add to Brazil’s woes, and the warning that Brazil’s economy risks falling back into seventh place globally – after overtaking the UK at the end of 2011.