Brazil & Southern Cone - December 2011 (ISSN 1741-4431)

President Dilma Rousseff insists that Brazil is ‘armoured’ against the continuing global turbulence and has encouraged Brazilians to “keep on producing and consuming”. “Now is not the time to tremble”, she encourages. Brazil’s domestic market, which accounts for around two-thirds of GDP (compared with just 13%-14% for exports), was its saving grace in the 2008-2009 crisis.

With virtually full employment and steady wage and credit growth, local consumer confidence remains relatively positive. A 7.5% real increase in the minimum wage in 2012, allied to additional public spending ahead of municipal elections and the 2014 World Cup, should keep the economy ticking over.

As widely trailed in advance, the national statistics institute officially reported zero real GDP growth on a quarterly basis in the three months to end September. In fact, there was actually a slight contraction of 0.04%. The annual result was 2.1%, the weakest since Q3 2009. Private consumption fell 0.08% quarter-on-quarter in line with earlier official measures to cool down the overheated domestic economy. In line with this, imports fell 0.37%. On the bright side, the result shows that the official policy levers work efficiently. President Rousseff said as much on 6 December, “GDP, which we deliberately had to slow down, still grew at about 3.2% [in 2011]. And that’s no small thing, given the crisis in the US and Europe”.

Monetary policy has now reverted to stimulus mode, which should kick in from the fourth quarter, helping to offset a weakening external sector. As expected, Brazil’s central bank cut the benchmark Selic interest rate by 50 basis points to 11% on 30 November, the third such reduction since August. “The central bank understands that by mitigating in a timely way the effects of a more restrictive global environment, a moderate adjustment in the base rate is consistent with a scenario in which inflation will converge to the target in 2012”, the bank’s monetary policy committee said in a statement. Annual inflation is slowly inching down from 7% to the target ceiling of 6.5%, though the core inflation nucleus, which excludes volatile food and energy prices, remains quite sticky (at just under 7%).

The move coincided with a coordinated monetary action by central banks in the US, Europe and notably also in China, to flush additional liquidity into local markets, with a view to shoring up the struggling Euro zone. Brazilian policy makers are keeping a close watch on the country’s main trading partner, China, which on 29 November reported the first contraction in its manufacturing index (PMI) in three years. The Rousseff administration also has room for manoeuvre on the fiscal side and thus, even if Brazil enters a technical recession, it should be short-lived.

That is not to say Brazil is immune – its high dependence on external financing makes it very vulnerable to external shocks of the magnitude unfolding in Europe. However, there is no sign, yet, of corporate deleveraging, despite a global investor rush to safe havens and orders from European corporate and banking HQ’s to pull back funds in order to cover obligations at home. Indeed, the central bank reported a net inflow of dollars into Brazil in October. And on latest data, between 1 January and 26 November 2011 net currency inflows were positive to the tune of US$68.85bn, on the back of a net financial inflow of US$26.3bn and a trade inflow of US$42.58bn. In the same period of 2010, the net inflow was US$24.79bn.

In 2008, the government stepped in and ordered state banks to maintain credit to the private sector to offset such outflows, providing a critical cushion of support for local producers. On 13 December President Rousseff rebuffed suggestions that Brazil could have credit problems in 2012. “Our credit situation is very advantageous. We are a country capable of facing the worst scenario”.

• Forecasts slip

The government admits that GDP growth will be less than 4% in 2011, with inflation edging back towards the target ceiling ( 6.5%). The central bank’s indicator of economic activity (IBC-Br) fell 0.32% month-on-month in October, the third consecutive contraction. It grew 3.04% in the first 10 months of the year. The government still expects real annual growth of 5% in 2012, above the local private sector consensus of 3.4%.