China Slowdown May Hinder Brazil Growth

By Ben Tavener, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – The modest recovery seen in Brazil’s economy could be jeopardized by the marked slowdown being witnessed in China, Brazil’s biggest importer, market experts have said. The warnings came after figures from the Instituto Brasileiro de Geografia e Estatística (Brazilian Institute of Geography and Statistics, IBGE) last week showed that the Brazilian economy had grown by 0.4 percent in the second quarter of the year.

However, the IBGE data also showed that poor performance by industry, reduced exports and fewer investments have been preventing a bigger recovery. Revised figures for the first quarter of 2012 showed just 0.1 percent growth in GDP.

Predictions for Brazil in 2012 have been cut a number of times in recent months, with the latest market opinion and the Banco Central (Central Bank) last week saying the year would end with just 1.64 percent growth.

Last week Finance Minister Guido Mantega said he believed 2013 would be a strong year for Brazil, with growth of “four percent or more,” but did not comment on whether 2012 would see figures lower than the 2.7 percent growth seen last year.

Forecasts for China – the world’s second biggest  economy – predict growth of 7.7 percent in 2012, after achieving growth of ten percent in mid-2011. July 2012 saw China’s demand for Brazilian exports slump ten percent as well, totaling R$3.95 billion (around US$2 billion). 

Now economists have been warning that the ripples of China’s sudden slowdown will be felt in Brazil and could hamper growth. However, economists appear divided over the extent to which China’s “slamming on the brakes,” as they have described it, can affect Brazil. 

One economist, Alessandro Rebucci from the Inter-American Development Bank (IDB), calculated that the impact of a slowdown in China could reduce Brazil’s potential growth by as much as ten percent.

Others say that although the impact could be higher than this, the worst has now passed and that now it is simply a question of how quickly Brazil can recovery. “If China sneezes, Brazil has to be a little on guard. China is our mirror image. We need to invest more, and they – less. But we shouldn’t be afraid because we are not expecting an abrupt or catastrophic fall in [China’s economy],” former World Bank economist Claudio Frischtak told O Globo newspaper.

Experts interviewed by The Rio Times say the fears are not just numerical, but also psychological, as a Chinese slowdown will only add to the feeling of uncertainty already overshadowing the global economy.

Policymakers in China have now adopted a strategy whereby the economy is moved from investment-driven growth, which in the recent past has required China to buy vast amounts of iron ore and other commodities from countries like Brazil. Now China is moving to a services-based economy, driven by domestic consumption from its ballooning middle class.

According to the IMF, just two years ago China consumed some forty percent of global base metals, such as aluminum and iron, for use both its major construction boom at home, and for the products it sells globally, particularly electronic goods.

Economists believe commodity prices will now settle down and that this, in turn, could lead to a slowdown in the Asian giant’s demand for commodities, which is far from good news for Brazil. One result, according to experts from Brazil’s banking sector, is that Brazilian investors are now looking for investment funds not exposed to the commodities sector.

The slowdown in China has also been contributed to a reduction in global demand for its exports, particularly from the European Union where countries are facing major economic uncertainty, as well as from lower growth in domestic consumption.