IN THE past few years Brazil’s economy has disappointed. It grew by
just 1.2% a year, on average, during President Dilma Rousseff’s first
term in office in 2011-14, a slower rate of growth than in most of its
neighbours, let alone in places like China or India. Last year GDP
barely grew at all (and may have fallen). It will almost certainly
contract in 2015. At the same time, public spending has surged. In 2014,
as Ms Rousseff sought re-election, the budget deficit doubled to 6.75%
of GDP. For the first time since 1997 the government failed to set
aside any money to pay back creditors. Its planned primary surplus,
which excludes interest owed on debt, of 1.8% of GDP ended up being a
0.6% deficit. Brazil’s gross government debt of 63% may look piffling
compared to Greece’s 175% or Japan’s 227%. But Brazil’s high interest
rates of around 12% make borrowing costlier to service. Last year debt
payments ate up more than 6% of output. To let businesses and consumers
borrow at less exorbitant rates, public banks have increasingly filled
the gap, offering cheap, subsidised loans. These went from 40% of all
lending in 2010 to 55% last year.
As the government loosened fiscal policy, the Central Bank
prematurely slashed its benchmark interest rate in 2011-12. This pushed
up inflation, which is now above the bank’s self-imposed upper limit
of 6.5%, and way above its 4.5% target. The interest-rate cut has since
been reversed. On March 4th the Bank’s monetary policy-makers raised the
rate once more, boosting it to 12.75%, which is higher than before the
decision to cut. Alongside the lack of macroeconomic rigour, there has
been a lot of microeconomic meddling: the government pursued a clumsy
industrial policy and shortchanged the private sector, for example by
insisting on absurdly low rates of return on concessions to run
infrastructure projects. Small wonder confidence slumped among
businessmen.
Red tape, poor infrastructure and a strong currency have
rendered much of industry uncompetitive. So consumers have been the main
source of demand. A low unemployment rate has pushed up wages. In the
past ten years wages in the private sector have grown faster than GDP
(public-sector workers have done even better). That allowed consumers
to borrow more, which encouraged still more spending. Now the virtuous
circle is turning vicious. Real wages are no longer increasing, mainly
because Brazilian workers’ productivity does not justify further rises.
People are returning to seek work just as there are fewer jobs to go
around: unemployment, which has long been falling and dipped below 5%
for most of 2014, increased to 5.4% in January.
To improve its
finances the government is cutting spending on unemployment insurance
(which had risen even when the jobless rate was falling) and on other
benefits. Taxes, including fuel duty, are going up. So, too, are bills
for water and electricity (two-thirds of which is generated by
hydropower). The point is to reduce demand following a record drought in
2014 and to correct a policy of holding down regulated prices to keep
inflation in check (and voters happy). Because of these increases,
inflation soared to 7.14% in the year to January.
All this is hurting disposable incomes, a big portion of which
are spent paying back consumer loans taken out in the good times.
Consumer confidence has fallen to its lowest level since Fundação
Getulio Vargas, a business school, began tracking it in 2005. The
government has no money to boost investment. Petrobras, the
state-controlled oil giant and Brazil’s biggest investor, is in the
midst of a corruption scandal that has paralysed spending: the forgone
investment may reduce GDP growth this year by one percentage point. It
is hard to see where growth will come from.
Worst of all, Ms
Rousseff’s policy levers are jammed. She cannot loosen fiscal policy
without precipitating a downgrade of Brazil’s credit rating. Nor can the
Central Bank ease monetary policy. That would once again undermine its
credibility—and weaken the currency. A depreciating real, which has
fallen 6% against the dollar compared to a month ago and is now at a
10-year low, pushes up inflation; it also makes Brazil's $230 billion
dollar-denominated debt dearer by the day. Ms Rousseff cannot bring
Brazil’s animal spirits back to life with more spending and lower
interest rates. She can only hope that her return to economic orthodoxy
will do the trick. It may take a while.
Fonte:
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