Disappointments

Disappointing growth in 1Q13 put into light structural constraints in the Brazilian economy. Inflationary pressures and the growing current account deficit have led the central bank to tighten monetary policy once again in May while intervening in the fx market and relaxing controls on portfolio capital inflows with the view to support the real. A large protest movement has spread to the main cities of the country since mid-June and may oblige the government to upgrade public services, meaning higher budget deficits. The government will have also to take urgent measures to enhance competitiveness if it wants to keep its rating both in the eyes of credit agencies and foreign investors.

Disappointing growth
Real GDP registered a lower-than-expected growth of only +2.2% q/q annualised in 1Q2013 (+1.8% yoy). Therefore we have revised down our growth forecast to 2.5% (from 3.5%) in 2013.

In terms of demand, the disappointing outcome is due to an almost stagnant private consumption (+0.2% q/q annualised or +2.6% yoy), caused by erosion in disposable income growth due to higher inflation in a context of slower job creation since the beginning of the year. On the contrary, investment strongly recovered (+20% q/q annualised and +2.7% yoy) in line with credit expansion fuelled by subsidized interest rates. However, the revival in investments has been largely covered with imports (28% qoq annualised, 7.2% yoy) while exports contracted strongly (-23% qoq, -5.1% yoy) in line with the global trade slowdown within emerging economies and owing to restrictions imposed by Argentina on its imports.

On the supply front, the primary sector was the only engine of 1Q2013 growth (+46% q/q annualised and +17.2% yoy) as the industry and services remained almost flat. The positive point is that industrial production is no more a drag on growth, which means that real GDP may accelerate in the coming quarters. But capacity utilisation in the industrial sector has already returned to a relatively high level, reflecting constraints on supply.

■ President Roussef: standing back to the wall For the first time since she took office in January 2011, popularity of Dilma Roussef dropped to 57% (-8% from March). Moreover, a large protest movement has spread to the main cities of the country since mid-June. Protests started due to an increase in bus fares, but the complaints have arisen against several issues, such as expenditures for the World Cup, corruption, crime and the poor quality of public services such as education and health.

Dilma Roussef is still the strongest candidate for the Presidential elections to be held in 2014. But if she wants to be re-elected, Dilma Roussef will probably have to propose a plan to upgrade public services, which could mean higher budget deficits. The problem is that, even before the recent demonstrations, S&P’s put a negative outlook on the sovereign rating (on June 6th), due to a weakening sovereign financial profile and structural constraints on growth.

Therefore, on top of increasing spending for public services, Dilma Roussef will have to take urgent measures to enhance competitiveness, notably reducing the so-called “Custo Brasil”; i.e. the heavy tax burden and costs related to administrative regulations. So far, the strategy followed by the government is basically to grant subsidized loans through the BNDES. But this does not make a genuine industrial policy.

BY Sara CONFALONIERI

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