beyondbrics

Growth in the Brazilian economy slowed down less-than-expected in the second quarter, indicating it could do even better than the previously predicted 7 per cent GDP expansion this year. Things look quite good for Brazil.

But could that be too fast? That was the worry early this year, but now the government seems to be a lot more sanguine.

In the first quarter, when the economy grew at a whiplash-inducing 11.4 per cent annualised rate, economists and bankers began to worry Brazil was in danger of overheating, that the economy was growing faster than could be sustained without inducing inflation.

For historical reasons, Brazilians are much more nervous about inflation that many other countries. Until the implementation of the very difficult policies of Fernando Henrique Cardoso, Brazil’s president from 1995 to 2003, the country experienced bafflingly high levels of inflation. That was not so long ago, and the fear is that even flirting with some inflation could be a slippery slope. As part of its inflation targeting system, Brazil has some of the highest real interest rates in the world.

Over the past few months, inflation data has been reassuring, and those fears seemed to dissipate. This week, the Brazilian Central Bank stopped a cycle of interest rate hikes that had began in April, citing reduced risk of inflation.

But today, the Brazilian statistics institute reported that Q2 quarter-on-quarter growth was 1.2 per cent, rather than the 0.7 per cent expected by analysts. That puts growth on the first half of last year at 8.9 per cent – the fastest expansion since 1996.

Is that a problem? Speaking at a conference call today, finance minister Guido Mantega had an answer: No.

The economy is slowing down on its own, he says, partially because of the withdrawal of stimulus measures, and little needs to be done by the government.

“I don’t see any need that the government take any action to decelerate the economy, as it is already happening by itself,” he said.

He seemed to think that because of this slowdown, Brazil was currently able to have the best of both worlds: “We will see a quite uncommon result: a growth rate of at least 7 per cent in GDP, which is the best you could have expected in the last 24 years, and inflation is under control.”

In a note released later today, he said: “The slight deceleration of growth in Brazil’s economy this quarter is healthy. Cyclical forces and controlled measures to withdraw monetary stimulus slowed the rates we’d seen at the start of the year, but overall Brazil’s economy is growing at a sustainable pace. Investment is increasing at a rate three times faster than GDP, which guarantees economic expansion without generating inflation.”

Analysts are divided. A note from Nomura Securities points out that the uptick this quarter was not driven by consumption, but rather agriculture and industry, so the risk for inflation is less. A note from Itaú Unibanco agrees on this point, but says domestic demand is still above what it considers sustainable, and there is risk of inflation in the medium term.

Coincidentally, many economists believe that Brazil could increase its potential growth rate, or the speed at which the country can grow without inducing inflation, by investing in infrastructure. Guido Mantega was 45 minutes late to the conference call, citing traffic problems. That this is entirely believable underlines the point even further.

Related reading:
Brazilian growth outstrips forecast, FT
How hot is too hot in Brazil?, beyondbrics