By Paul Kiernan and Rogerio Jelmayer at The Wall Street Journal
For all the debt crises, hyperinflation and boom-and-bust cycles Brazil’s economy has suffered in recent decades, the country hasn’t posted two consecutive years of contraction since the Great Depression.
But if 2014’s fourth quarter was as bad as many economists think and their expectations for this year hold true, Brazil will repeat that feat for the first time since 1930-31.
On Monday, economists polled weekly by Brazil’s central bank downgraded their consensus 2015 forecast to a 0.5% fall in gross domestic product.
And the central bank’s preliminary indicator this month revealed a 0.12% drop in economic activity in 2014, though the Brazilian Institute of Geography and Statistics won’t release official GDP figures for the year until next month.
Finance Minister Joaquim Levy recognized the possibility of a 2014 decline at an event in the New York last week. “We’ve been in a slow patch more recently and we all [feel] that growth has slowed down,” Mr. Levy said in a Feb. 18 presentation to the Americas Society/Council of the Americas. “Maybe last year it was even negative.”
Several factors are weighing on Brazil’s once-dynamic economy.
Growth in China, Brazil’s largest trading partner, has slowed, damaging demand for Brazilian iron ore, soybeans and other commodities and weakening the currency.
A record-breaking drought has left parts of Brazil’s biggest city, São Paulo, without drinking water, while reservoirs feeding many hydroelectric dams are near record lows. With the end of the rainy season approaching, experts say more rolling blackouts are likely. Economists at Itau, one of Brazil’s biggest banks, say expected water and energy rationing could shave 0.6 percentage point off GDP growth.
Economists say the construction sector is particularly vulnerable due to fallout from a broad investigation into an alleged bribery and money-laundering scheme between state-controlled oil firm Petrobras and its contractors. Brazil’s largest construction firms have been caught up in the scandal, which has imperiled their credit ratings and brought some to the brink of bankruptcy.
Other headwinds originated in the offices of politicians and economic policy makers who, in their efforts to keep Brazil’s economy moving following the 2008 global crisis, boosted spending on social programs and rapidly expanded consumer credit. In doing so they fueled inflation more than growth.
“Brazil is suffering the effects of the government’s misdiagnosis of the economy dating back to 2011,” said Alessandra Ribeiro, an economist at São Paulo’s Tendencias consultancy, which estimates that Brazil’s GDP contracted 0.1% in 2014 and will shrink another 1.2% this year. “That created a variety of imbalances like inflationary pressure and fiscal deficits.”
Now, the South American giant is facing an economic policy maker’s nightmare of high inflation, low growth, and almost no wiggle room in the budget to ease the pain for ordinary Brazilians. On the contrary: The Finance Ministry has instead raised consumption-related taxes and tariff increases that experts say will hit the poor and middle-class Brazilians hardest.
Economists expect inflation to hit 7.48% this year, according to the weekly survey, which would be above the central bank’s 6.5% limit and Brazil’s highest annual inflation rate since 2004.
To be sure, that is a far cry from the quadruple-digit inflation rates that periodically ravaged Brazil until the early 1990s. Such high inflation rates ended up “masking” the actual performance of the economy because of how GDP is calculated, noted Alex Agostini, chief economist at Brazil’s Austin Rating. “Today the risk of Brazil having consecutive drops in GDP is bigger,” he said.
Still, the central bank last month raised its benchmark Selic rate to 12.25%, further squeezing businesses and consumers out of credit.
The National Confederation of Industry said Monday that business confidence in the industrial sector fell sharply this month to the lowest level since 1999, when the index began.
The Petrobras scandal is also threatening to undermine President Dilma Rousseff ’s influence over Congress, which will be key to passing the sort of long-term reforms that economists say would be necessary for Brazil to resume faster growth.
“The upshot is that the next couple of years are unlikely to bring much respite to Brazil’s beleaguered economy,” Capital Economics’ Neil Shearing said in a recent report. “And the likelihood of a turnaround once the current austerity ends is slim, too. The key to reinvigorating growth in Brazil lies in raising its woeful productivity performance. But this will require wide-ranging structural reforms which look unlikely.”