Brazil rebound boosts region's hopes
Latest data seem to indicate a rebound in Brazil but this is likely to be subdued as structural issues are not addressed
Brazil has harvested a series of positive indicators in terms of economic activity since the beginning of the year, and unemployment is still at a record low, but there are doubts among investors about how sustainable this will be.
While some economic recovery may well be underway, it will remain modest and may not be sustainable, according to many private sector economists.
Brazil is finally about to rebound, said Ramon Aracena, chief Latin America economist at the Institute of International Finance, in an interview with Emerging Markets. However, some contradictory aspects in the economic policies of the country mean that growth will remain subdued.
Potential growth has been declining. It was around 4% four years ago, but is now at around 3.5%. The current situation is hardly sustainable, he said. Aracena nonetheless acknowledged that Brazils growth of between 3.5% and 4% this year will lift Latin Americas overall growth to 3.4% from 2.6% last year.
The Brazilian government is again aiming at GDP growth of at least 4% in 2013 following a poor result last year, when GDP posted a meager 0.9% growth, mainly due to a marked decline in investment, which contrasts with the governments aim to lift gross fixed investment in order to enhance productivity.
The main push is coming from industrial production, which has started to rebound by 2.5% in January month on month after a long period of contraction.
We are now leaving behind this period of weak growth, now growth is gaining momentum until the end of the year, finance minister Guido Mantega said after the industrial production figures were released last week.
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Retail sales also rose above expectations, according to official statistics released yesterday. They increased by 0.6% in January compared to December and a strong 8.3% over 12 months. But it is not only about consumption this time.
Investment is coming back a little. We forecast 1% growth this year. It is still a slow recovery, said Guilhermo Loureiro, economist at Barclays Capital in Sao Paulo. Still, the 1% rise is in sharp contrast with last years 4% drop. Some government measures such as tax breaks have bolstered investor confidence, Loureiro said, but on the other hand government activism and interventionism have weighed negatively on some investment decisions.
This series of positive economic indicators is expected to boost the IBC-br, a closely-watched monthly index of economic activity that the central bank is due to release today.
But the recovery may be short lived as long as structural issues are not addressed, the IIF economist warned. Its a problem of policy balance, Aracena said. While expansionary fiscal policy continues to support domestic demand, it will prove harder for monetary policy to balance sustained growth, he said. If interest rates remain low, you have to have more fiscal restraint. In the longer term, monetary policy tightening will probably rein in economic growth next year, analysts said.
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