SAO PAULO, (Reuters) – Brazil’s government promised aggressive new stimulus measures after data showed the economy expanded just 2.7 percent in 2011, raising fears that one of the world’s most dynamic emerging markets is now slipping into a new era of mediocre growth.
The sharp slowdown during President Dilma Rousseff’s first year in office saw Brazil underperform almost all of its peers in Latin America as local industries struggled with soaring business costs and an overvalued currency. A rebound in consumer spending and strong agricultural exports only barely allowed Brazil to avoid recession during the second half of the year, the data released yesterday showed.
Investors bet the weak performance would lead Brazil’s central bank to slash interest rates more aggressively, with a cut of at least half a percentage point, and possibly 75 basis points, expected following the bank’s meeting today.
Finance Minister Guido Mantega pointed to data showing a modest recovery in the fourth quarter that he said is likely to accelerate throughout 2012, while vowing that the government would offer tax incentives and other unspecified stimulus measures to spur manufacturing and investment in particular.
“We are better placed to give stimulus this year,” Mantega told reporters in Brasilia. “We will implement all the necessary measures to stimulate the economy.”
Nonetheless, the data reinforced the biggest concern of Rousseff and many business leaders – that Brazil may be downshifting into a prolonged period of lacklustre 3 percent annual growth as a tight labour market, woeful infrastructure and other barriers prevent the economy from expanding any faster.
“Things just aren’t taking off,” said Senator Valdir Raupp, the head of the PMDB party, which is part of Rousseff’s coalition. “Investments aren’t happening. There are just a few sectors where things are going well.”
Stimulus could backfire, too. Inflation reached a seven-year high of 6.5 percent last year, and while it has slowed in recent months, there may simply not be much room for the government to jolt the economy without risking another bout of price rises.
“If this year continues at the same rhythm as last year, the (economy) could frustrate us again. Starting now, we’re going to have to give it a boost,” Raupp said.
Economic activity expanded 0.3 percent in the fourth quarter following a revised 0.1 percent contraction in the previous quarter, government statistics agency IBGE said.
The biggest drag on Brazil’s economy continues to be industry, which contracted 0.5 percent in the fourth quarter compared with the previous quarter. Manufacturers have blamed most of their problems on Brazil’s currency, which has strengthened about 40 percent since the depths of the financial crisis in 2009 and 6 percent this year.
Rousseff has already implemented targeted tax incentives in recent months to try to help sectors such as autos and consumer goods that have struggled. Her government also has raised the ire of some countries and multinational companies by threatening to raise tariffs on auto imports from Mexico, for example.
Mantega said the government is still aiming for 4.5 percent growth this year. However, many business leaders and politicians say that the core problems are more related to high taxes and other costs that will necessitate tough economic reforms to fix – something Rousseff has shown little interest in doing.
“Worse than the GDP result is the proof that Brazil is becoming an uncompetitive country,” said Senator José Agripino, from the opposition DEM party.
WELL BEHIND
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Despite the disappointing result of 2011, the residual glow of recent years means that Brazil still feels like a country enjoying an economic boom.
Unemployment remains near record lows, and Rousseff’s approval rating remains around 70 percent. Many Brazilians, especially those among the estimated 25 million who have joined the middle class over the past decade, continue to acquire houses, cars and household goods at a pace never seen before.
