Brazil: economy: the squeeze is on April 2014
Published 16 April 2014
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In its April World Economic Outlook the IMF once again reduced its growth projections for Brazil from 2.6%. to 1.8% in 2014. It reduced its 2015 forecast to 2.7% from 2.9%. Local market analysts have for some time been predicting even lower growth, 1.6% in 2014 and 2% in 2015.
At the same time, annual inflation jumped to 6.15% to the end of March. Food and transport price increases pushed March monthly inflation to 0.92%, above market expectations.
Finance Minister Mantega acknowledged that inflation might breach the 6.5% upper target band during 2014. Higher mid-year inflation is expected due to the World Cup, though higher air fares already hit the March data. The corresponding months last year saw relatively small prices rises, so higher monthly inflation this year may drive up the moving average annual rate above 6.5%. The official inflation target, however, is evaluated only at year’s end.
The Central Bank continued its tightening cycle, raising the base interest rate by 25 b.p. to 11% at the beginning of April. The Monetary Policy Committee’s statement suggested there would be a pause in tightening to evaluate its impact, but March inflation may impel the Committee to increase interest rates at the end of May and perhaps beyond.
Consumers are feeling the squeeze. Their confidence about inflation, employment and financial situation fell sharply in March. Former President Lula recently suggested that Dilma should announce a plan to accelerate Brazil’s growth. The problem is that there are no easy recipes. Boosting demand in a supply-constrained economy would only stoke inflation and the current account deficit, as has happened during the past three years.
The IMF recommends combining fiscal with monetary tightening to contain inflation. Reducing demand would ease the current account deficit. The Fund also recommends less use of exchange rate interventions to control inflation. It warns that intervening to strengthen the Real will widen the current account deficit and could leave Brazil dependent on increasing volumes of speculative capital to finance it.
However, IMF policies would cut demand and reduce growth in 2015, in the run up to an election. Even a weaker Real would not help Brazilian industry much because it now imports a higher share of inputs (24%) than the share of output it exports (20%). The benefits of the IMF diet would be felt only later.
The same is true of other important structural reforms e.g. tax reform, reduction in bureaucracy, speeding up legal process, and making public procurement more efficient. Infrastructure, another key structural reform, is proceeding more quickly, but has a long way to go. As with Brazil’s investment in education, the impact on growth will only become more palpable in a few years time. Attachment: March Economic Focus
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