beyondbrics

So Brazil could be headed for a technical recession after it reported an admittedly very slight contraction in economic growth for the third quarter of 0.04 per cent compared with the previous three months. Is there any reason to panic?

Says Capital Economics:

Given that leading indicators suggest that the economy may contract by around 0.3 per cent quarter on quarter in the current [December] quarter, the outturn means that the Brazilian economy may be in a technical recession. The central bank’s … activity indicator contracted in October, while November’s manufacturing PMI suggests that the industrial sector remains in recession.

Before we go any further, is this any reason to worry? Apparently not: Brazil has the foreign reserves, sound banking system, solid government finances and so on to weather the crisis. From Nomura:

The fallout from the eurozone sovereign debt crisis should hit growth in 2012. But the policy response should be sufficient to keep growth positive and lead to a stronger recovery in 2013.

Perhaps of longer term significance is that if the technical recession does happen, the central bank and the government will have been proven right in their sprint to cut interest rates earlier this year.

You will recall that in August the central bank abruptly ended a tightening cycle by cutting the benchmark Selic interest rate by 50 basis points without a pause. At the time, central bank governor Alexandre Tombini warned that the outlook in Europe was far worse than people were expecting. He seems to have been proven right although economists will continue to dispute the manner in which he went about making the cuts (too abrupt, not enough signalling, they say).

One person who is not quibbling with him is President Dilma Rousseff. The cuts serve two purposes for her. They shore up economic growth, which is politically popular. And they cater to her long-held aim of bringing Brazil’s real interest rates down to levels closer other countries.

During the last crisis, Brazil blew the opportunity of reducing rates permanently by pump-priming the economy well beyond what was necessary. Rousseff cannot complain about that – the splurge of fiscal spending and state bank lending helped her win office during presidential elections last year. But now she wants to undo the damage.

Whether she can succeed in this, however, is doubtful at least in the near term. Most economists believe inflation will stay relatively high next year, above the mid-point of the central bank’s target of 4.5 per cent plus or minus 2 percentage points. After that, the global economy will begin to recover and Brazil will be off to the races again, with the same problems of over-heating and high interest rates likely to recur.

Again Nomura sums it up:

Policy: In our view, policymakers are attempting to operate a new economic regime with multiple targets – growth, inflation and the exchange rate.

And:

We believe the multiple-targeting framework will lead to a “stop-and-go” monetary policy, with inflation risks remaining high even in a period of external headwinds. Risks are clearly to the downside for growth, given the large external risks faced by Brazil, whose economic performance remains closely tied to that of China.

Long-suffering consumers forced to pay one of the world’s most usurious rates of interest will hope Nomura is wrong. But foreign investors looking to continue to enjoy the amazingly high spreads offered in Brazil will pray that the trade continues.

Related reading:
Brazil’s rapid growth shudders to a halt, FT
Brazil must look to the future, beyondbrics
Brazil: Mantegna gloats as Europe burns, beyondbrics
Brazil’s success – an optical illusion? beyondbrics