Weaker Brazil Economy Raises Doubts About Credit-Led Growth

Brazil’s economy grew less than analysts expected in the first quarter, reinforcing signs that its consumer-led growth model, a magnet for investment over the past decade, is running out of steam.

Gross domestic product expanded 0.2 percent in the first quarter and 0.8 percent from the same period a year ago, the national statistics agency said in a report today. Growth in the first three months of the year was lower than expected by all but one of 50 analysts surveyed by Bloomberg, whose median forecast was for a 0.5 percent expansion.

While economists expect the pace of growth to accelerate in coming months, they forecast the second-largest developing economy after China will grow less than 3 percent for the second consecutive year in 2012, trailing the rest of Latin America.

Consumer demand driven by credit expansion, the strategy pursued by two successive presidents, is faltering even as the government cuts taxes and lowers borrowing costs to stoke spending by the 40 million Brazilians who rose out of poverty from 2003-2011. Retail sales barely rose in February and March, while vehicle sales fell 11 percent in April as the default rate among tapped-out consumers rose to 5.8 percent.

“Brazil had a great decade and now it’s going into a slowdown,” Michael Shaoul, chairman of Marketfield Asset Management, said by telephone from New York before the report was released. “People owe a lot and own too much stuff.”

BRICS Faltering

Investors are concerned that some of Brazil’s fastest-growing sectors will lose steam. The MSCI Brazil Consumer Discretionary Index of construction and retail companies has plunged 13 percent this year compared with a 5 percent fall for the Bovespa stock index. A slowdown in mortgage lending, which grew by 43 percent over the past 12 months, is a particular risk to the housing market, Shaoul said.

As Europe’s debt crisis has deepened, causing $3.9 trillion in losses in world stock markets since May, the government has abandoned its goal of boosting growth to 4.5 percent from last year’s 2.7 percent. Economists in the latest weekly central bank survey cut their forecast for 2012 growth for the third straight week to 2.99 percent.

Other emerging markets that have been powering the world economy since the collapse of Lehman Brothers Holdings Inc. in 2008 are also losing steam. India reported first quarter growth of 5.3 percent yesterday, the least in nine years. China this year will expand 8.2 percent, its slowest pace in 13 years, according to a Bloomberg News survey of analysts.

Debt Burden

Nearly a quarter of Brazilian households, particularly those in lower-income brackets, are over-indebted, according to MB Associados, a Sao Paulo-based economic consulting firm. That means they spend more than 30 percent of total income on servicing debt, compared with an average 10.9 percent for all U.S. households, the firm said.

Instead of trying to stimulate demand with further credit measures, policy makers should focus on removing long-standing bottlenecks to faster growth, such as high taxes, red tape and poor infrastructure, said Arminio Fraga, a former central bank president and chairman of the BM&F Bovespa exchange.

“The time has come for Brazil to make progress on the supply side, investing more,” Fraga, a founding partner of Rio de Janeiro-based asset manager Gavea Investimentos Ltda., said in a May 22 interview. “Paying more attention to productivity is crucial from now on.”

Poor Harvest

A poor grain harvest and weak export growth contributed to the first-quarter GDP result, as investment fell due to a worsening of the global economic scenario, Finance Minister Guido Mantega said today in a conference call from Sao Paulo.

While strong demand and recent government measures will allow the economy to accelerate in the second half of the year, it will be difficult to reach 4 percent expansion this year, Mantega said. “We’ll be satisfied if we achieve growth in 2012 above growth in 2011,” he added.

Today’s GDP report confirmed that Brazil’s economy is recovering “very gradually,” central bank President Alexandre Tombini said in an e-mailed statement.

Lowest Investment

Brazil invested 20 percent last year, the lowest among Latin America’s major economies and compared with 48 percent in China, according to International Monetary Fund data.

In the first quarter, investments fell 1.8 percent from the previous quarter, the statistics agency said. Agricultural activity fell 7.3 percent while the industrial sector advanced 1.7 percent after a weak performance at the end of 2011. The services sector, which is driving growth, rose 0.6 percent.

“Growth is taking longer to recover than what was expected,” Marcelo Salomon, co-head for Latin America Economics at Barclays Plc, in a telephone interview from New York. “Businessmen in Brazil are delaying their investments.”

Despite higher import tariffs for sectors such as chemicals and textiles, industrial output fell in April on a yearly basis for the eighth straight month, the national statistics agency reported yesterday. In the first four months of the year the trade deficit on manufactured products widened $4.1 billion to $30.7 billion from the same period a year earlier, according to Trade Ministry data.

In a country that prides itself on its industry, even if the past decade’s boom was aided by surging commodity exports to China, only 28 percent of the industrial machinery and equipment bought in Brazil is manufactured domestically, according to the machine builders’ association known as Abimaq.

Protecting Industry

On April 3 President Dilma Rousseff announced incentives to boost government purchases of locally made goods, tougher enforcement of trade rules and the elimination of a 20 percent payroll tax for 15 industries. She also has raised taxes on foreign dollar inflows to weaken the real that was the world’s best-performing major currency in the first two months of the year, and expanded subsidized lending by the state development bank BNDES.

The measures were too little and too late to reverse a trend of rising imports that began five years ago, said Jose Velloso, Abimaq’s vice-president. “We’ve got a ship with three holes and only managed to plug one,” Velloso said by telephone from Sao Paulo, adding that he sees industrial output contracting this year by 2 percent to 3 percent.

While a 14 percent depreciation of the real in the past three months may provide industry with some relief, it is unlikely to do much to improve its competitiveness as wages rise at twice the rate of inflation, Morgan Stanley said in a May 25 report.

‘Unacceptable’ Rates

The government prompted banks to lower borrowing costs after Rousseff in a televised address to the nation May 1 said the rates they charge are “unacceptable.” The central bank has done its part to lower borrowing costs by freeing up 18 billion reais ($9 billion) in reserves to encourage banks to lend to car buyers. This week it cut its benchmark Selic rate for the seventh time since August, taking it to a record 8.5 percent.

The government isn’t concerned about over-stretching consumers. Domestic demand fueled by a “moderate” expansion of credit and a strong labor market will allow growth to accelerate in the coming months even as the global outlook remains “complex,” Tombini said in the e-mailed statement today.

Consumer confidence hit a record high in April, and unemployment was 6 percent, a record low for the month.

“Our outlook is positive,” Gustavo Bach, chief executive officer of Rio de Janeiro-based retailer Hermes Group, said in a telephone interview. “There’s still a lot of pent-up demand for consumer goods.”

Still, Brazil must step up its efforts if it wants to boost its growth potential in coming years, said Alberto Ramos, senior Latin America economist at Goldman Sachs & Co.

“They’re neglecting the long-term reforms to boost growth capacity,” Ramos said by telephone from New York. “Brazil is not investing enough and if you don’t invest, you don’t grow.”

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