Brazil’s economic ‘mini-bubble’ is deflating
July 28, 2010
SAO PAULO: A short-lived “mini-bubble” in Brazil’s economy appears to be deflating faster than most investors had anticipated.
After posting a China-like annual growth rate of 9 percent in the first quarter, a cool down to more sustainable rates of 4 percent to 5 percent was inevitable given Brazil’s chronic bottlenecks in infrastructure and other areas.
But recent data suggest that more conservative spending by Brazilian consumers, a sudden outbreak of pessimism among local manufacturers, and a growing global aversion to risk are taking an unexpectedly heavy toll on what has been one of the world’s only economic bright spots.
Indeed, economic activity may have even contracted in June compared to May, Morgan Stanley’s Latin America economist Gray Newman said in a report issued Monday. He cited several “sluggish” leading indicators such as auto production, electricity usage and traffic on toll roads.
May was also weak, with zero growth compared to April, according to a central bank proxy for economic activity.
For now, local economists still expect Brazil’s economy to expand 7.2 percent this year, according to the latest weekly central bank survey, issued on Monday. But many market participants are in the process of “reassessing” their forecasts, said David Beker, head economist for Latin America at Bank of America Merrill Lynch.
“There are some signs that Brazil is coming more in line with the rest of the world,” Beker said. “We’ve seen a couple of data sets on the downside now.”
Luciano Coutinho, the head of state-run development bank BNDES, told investors in Washington earlier this month that Brazil had seen a “mini-bubble” in the first quarter as consumers rushed to take advantage of temporary tax breaks on durable goods and other products before they expired.
The sudden reversal of that trend is now reverberating throughout the economy as inventories rise and manufacturers adjust production accordingly, said Tony Volpon, head of Americas emerging market research at Nomura Securities.
“You saw everybody just went on a bender during the first quarter and bought all the TVs and cars they wanted, and now they’ve just stopped,” Volpon said. He described recent inflation and economic data as “really disappointing.”
The weak data may partly account for the central bank’s decision to raise its Selic interest rate by 50 basis points last week to 10.75 percent. Economists in a Reuters poll had overwhelmingly expected a 75 basis point increase.
Meanwhile, economists have slowly perhaps too slowly been incorporating the less bullish economic outlook into their forecasts for Brazil’s inflation and interest rates.
In Monday’s central bank poll, they revised their inflation forecasts for 2010 down for the third straight week to a median 5.35 percent. The poll also showed their expectations for the year-end Selic rate fell to 11.75 percent from 12 percent in the previous survey.
The central bank will publish the minutes from last week’s meeting on Thursday.
Coutinho said Brazil’s economy “is now back to cruising speed,” and underlying data back up the thesis that it can still make an orderly transition to lower growth. Unemployment remains near historic lows at 7 percent, consumer confidence is soaring, and the country’s high interest rates make it a favorite among foreign investors.
Yet there are other signs of trouble. Newman, the Morgan Stanley economist, said he was concerned by a 3.4 percent drop in June in corrugated paper production which he said is used for packaging and closely linked to manufacturing shipments.
A recent survey of 1,673 small and large manufacturers by Brazil’s National Industry Confederation (CNI) showed that business confidence in July experienced its biggest one-month drop since the worst moments of the financial crisis in 2008.
“Apparently, the (confidence) indicator is finding a new level as the recovery consolidates,” the CNI said in a report.
Even Brazil’s love affair with foreign investors may be cooling. Data released Monday showed that foreign direct investment fell to $708 million in June, less than half the $1.5 billion level forecast by analysts in a Reuters poll.
After posting a China-like annual growth rate of 9 percent in the first quarter, a cool down to more sustainable rates of 4 percent to 5 percent was inevitable given Brazil’s chronic bottlenecks in infrastructure and other areas.
But recent data suggest that more conservative spending by Brazilian consumers, a sudden outbreak of pessimism among local manufacturers, and a growing global aversion to risk are taking an unexpectedly heavy toll on what has been one of the world’s only economic bright spots.
Indeed, economic activity may have even contracted in June compared to May, Morgan Stanley’s Latin America economist Gray Newman said in a report issued Monday. He cited several “sluggish” leading indicators such as auto production, electricity usage and traffic on toll roads.
May was also weak, with zero growth compared to April, according to a central bank proxy for economic activity.
For now, local economists still expect Brazil’s economy to expand 7.2 percent this year, according to the latest weekly central bank survey, issued on Monday. But many market participants are in the process of “reassessing” their forecasts, said David Beker, head economist for Latin America at Bank of America Merrill Lynch.
“There are some signs that Brazil is coming more in line with the rest of the world,” Beker said. “We’ve seen a couple of data sets on the downside now.”
Luciano Coutinho, the head of state-run development bank BNDES, told investors in Washington earlier this month that Brazil had seen a “mini-bubble” in the first quarter as consumers rushed to take advantage of temporary tax breaks on durable goods and other products before they expired.
The sudden reversal of that trend is now reverberating throughout the economy as inventories rise and manufacturers adjust production accordingly, said Tony Volpon, head of Americas emerging market research at Nomura Securities.
“You saw everybody just went on a bender during the first quarter and bought all the TVs and cars they wanted, and now they’ve just stopped,” Volpon said. He described recent inflation and economic data as “really disappointing.”
The weak data may partly account for the central bank’s decision to raise its Selic interest rate by 50 basis points last week to 10.75 percent. Economists in a Reuters poll had overwhelmingly expected a 75 basis point increase.
Meanwhile, economists have slowly perhaps too slowly been incorporating the less bullish economic outlook into their forecasts for Brazil’s inflation and interest rates.
In Monday’s central bank poll, they revised their inflation forecasts for 2010 down for the third straight week to a median 5.35 percent. The poll also showed their expectations for the year-end Selic rate fell to 11.75 percent from 12 percent in the previous survey.
The central bank will publish the minutes from last week’s meeting on Thursday.
Coutinho said Brazil’s economy “is now back to cruising speed,” and underlying data back up the thesis that it can still make an orderly transition to lower growth. Unemployment remains near historic lows at 7 percent, consumer confidence is soaring, and the country’s high interest rates make it a favorite among foreign investors.
Yet there are other signs of trouble. Newman, the Morgan Stanley economist, said he was concerned by a 3.4 percent drop in June in corrugated paper production which he said is used for packaging and closely linked to manufacturing shipments.
A recent survey of 1,673 small and large manufacturers by Brazil’s National Industry Confederation (CNI) showed that business confidence in July experienced its biggest one-month drop since the worst moments of the financial crisis in 2008.
“Apparently, the (confidence) indicator is finding a new level as the recovery consolidates,” the CNI said in a report.
Even Brazil’s love affair with foreign investors may be cooling. Data released Monday showed that foreign direct investment fell to $708 million in June, less than half the $1.5 billion level forecast by analysts in a Reuters poll.
