Brazil: The Recovery: So Far, So Goodby
Brazil's six-month-old recovery from the 1998-99 recession that engulfed most of Latin America is gaining momentum. Growth is strong and inflation is falling, as are interest rates. While several risks could spoil the outlook, the recovery seems set to continue into 2001.
Powered by the industrial sector, real gross domestic product grew at a stronger-than-expected 5% annual rate in the first quarter, after an upwardly revised 9.4% pace in the fourth quarter. Growth from a year ago now stands at 3.1%, and economists expect growth in the 3.5%-to-4% range both this year and next. Exports and business investment are leading the recovery, while consumer spending is lagging behind--still depressed by high unemployment, at 8.5% in April, and by wage growth that is not keeping up with price rises.
Still, inflation progress remains good. Through April, consumer inflation fell to 6.8%, down from 8.9% in 1999, and by yearend it should come close to the government's 6% target. The improving inflation outlook will give the central bank room to continue lowering interest rates, currently at 18.5%.
Two key risks temper Brazil's outlook, however. First, unsettled conditions in U.S. markets and rising interest rates globally threaten Brazil's currency and capital flows. Through April, the external balances look good: Foreign direct investment is more than sufficient to cover the current-account deficit. But that could change quickly if the real came under attack by speculators. Therefore, the central bank will move cautiously in lowering rates.
Second, although the fiscal accounts have improved this year, progress on fiscal reform may stall ahead of the October municipal elections, as parties gear up for the 2002 presidential race. The first-quarter primary surplus, excluding interest payments, was $13.6 billion, about twice the level stipulated in Brazil's loan agreement with the International Monetary Fund. However, spending discipline in the coming year may be difficult to maintain.