ANALYSES

Brazilian Economy: a challenge on the horizon for Dilma

Tribune
10 juin 2013
However, the performance of GDP in the first quarter, when it grew by only 0.6%, seems to be an indicator that the economy will be a challenge for the president from now on.

Even though agriculture and investments have shown increaser in the first quarter of 2013 compared to the fourth quarter of 2012, increasing respectively from -6.1% to 9.7 % and 1.3% to 4.6%, industry and household consumption were much lower than expected result.

Industry, which registered negative growth of -0.6% in the fourth quarter of last year, once performed poorly in the first quarter of 2013 (-0.1%). Household consumption, a key driver of the economic growth model created by Lulism, stagnated (1% in the fourth quarter of 2012 fell to 0.1% in the first quarter of this year). It is worth adding that without agriculture, the country's Q1 growth would be only 0.2%.

The slowdown household consumption can be attributed to higher inflation. Higher debt levels and worsening credit conditions, especially regarding deadlines for payment of purchases, are also factors that discourage consumption.

Last Wednesday, the same day that the IBGE announced growth results for the first quarter, the Central Bank decided to raise the interest rate from 7.5% to 8% per year, which points to the bank's concern with inflation. Despite this decision to help reduce inflationary indicators, economists argue that higher interest rates will also reduce growth, which is low.

Apparently, the low growth in the first quarter will lead the government to rethink the expansion model, which combines fighting inflation as a second priority along with stimulating access to credit and creating packages of tax cuts. Incidentally, it was not by chance that the finance minister, Guido Mantega, said shortly after the announcement of the results of the first quarter GDP that new stimuli are required.

One of the alternatives mentioned is the focus on investment, mainly due to the positive performance in the first quarter (4.6% growth). Note that, according to the government, in 2014 grants in logistics and energy will enable the entry of billions of dollars into these sectors.

Q1’s GDP growth disappointment generated an immediate effect on the market and government. The private economic consultants and also the Ministry of Finance downgraded growth expectations.

Although Guido Mantega has not revealed the government’s growth estimates, background information suggests that the expectation for annualised GDP growth to be around 2.7%. Among private consultancies, the estimate ranges from 2% to 3%. As a result, there are economists who argue that Brazil may be entering a period where a stagnant economy combines with high inflation, producing so-called stagflation.

Another concern is unemployment. According to numbers disclosed by SEADE and Dieese (Department of Statistics and Socioeconomic Studies), the rate increased from 11% to 11.3% in seven regions of the country, representing 52,000 jobs lost between March and April. Considering full employment is one of the main linchpins of Dilma Rousseff’s fight with the opposition, a possible increase of this ratio could cause changes in the political arena. Thus, the government need to make sure this index does not continue to increase.

An economic environment of low growth, with falling consumption and high inflation, will make the government consider changes, since they know any impediments in the economy will create political uncertainties, thereby making the opposition stronger in 2014.

Today, the biggest worry is inflation, as not only does this affect Brazilians’ real income but it also brings back memories of the recent past when inflation was rife. It is worth noting that research conducted by PT indicates that although the electorate think the government is good and wants to re-elect Dilma, inflation is already causing consternation, which helps to explain the quick decision of the central bank to raise the rate of interest.

Not coincidentally Senator Aécio Neves (PSDB) and Governor Eduardo Campos (PSB-PE), potential candidates for the presidency, are using economic themes in their speeches. Aécio prioritises inflation, drawing on the success of the government of former President Cardoso in this area, while Campos has said, 'the government should talk less about the election and more about economic development.'

This climate of uncertainty in the economy, added to the criticism that the government is receiving even from allies, on account of its difficult relationship with the base in Congress, has put the the PMDB, the main partner of PT, in a difficult position regarding the presidential dispute.

Besides criticising the political relationship with the Executive and the PT’s resistance to supporting PMDB candidates for governor in some states (which makes the approval of the alliance between the two parties at the national convention of the PMDB difficult), the party leaders also question the government’s economic policy decisions.

Last week, in an interview with Radio Tudo FM of Salvador, the president of the PMDB in Bahia Geddel Vieira Lima, questioned the national alliance with the PT and said: 'If you have lower GDP, prices increases, soon these indicators are reflected in people's pockets. If you begin to feel that the job is no longer so easy, it is clear that this will create electoral consequences'

It is precisely this 'electoral effect' of the economic scenario that Dilma Rousseff must avoid, as a possible 'negative turning point' in the economy as any weakness will strengthen Aécio Neves and Eduardo Campos, and could lead the PT’s allies, especially the PMDB, to rethink their support for the president.