Current GDP growth amongst historical lows

The Brazilian economy remained virtually flat in the first quarter of 2014, inching forward by a measly 0.2% over the previous three months. One of the reasons for this abject performance was the fall of 2.1% in the total amount of company investments in expanding productive capacity. This was the third successive quarterly decline and brought a cumulative retraction of 5% since June 2013. Furthermore, there was a reduction in total household consumption which highlighted the difficulty in maintaining the current level of consumption faced with higher prices. The finance minister, Guido Mantega, even acknowledged this when he commented on the announcement. “Had it not been for higher government spending, the variation in GDP would have been negative,” claimed Marcos Casarin, an economist at the Oxford Economics consultancy. “The numbers confirm that the growth cycle driven by higher consumption has reached its limit.” As many workers have committed a large part of their income to paying off debts, they have made big cutbacks in buying new goods. Another factor is the higher cost of credit.

Brazil now has a more solid economy than in the past and there is no imminent crisis. Moreover, the unemployment rate remains low despite the reduction in the rate of job creation in recent months. Nevertheless, the economic situation is undergoing a long, uncomfortable phase of low growth and high inflation. The amplified consumer price index (local acronym IPCA), which is the official government index, could break through the ceiling of the inflation target of 6.5%. Despite this pressure from the weak activity, the Central Bank decided last week to interrupt its sequence of hiking the base interest rate, known as the Selic, and left it unchanged at 11% a year. The Central Bank believes that by doing this, the index will converge to the center of the inflation target, set at 4.5%, in the coming months. Only the future will tell if this was the right decision.

The latest market forecasts indicate that the average annual growth rate of GDP in the four years of the Dilma Rousseff government is unlikely to exceed 2%. This would be even lower than the result registered in the four years of the second mandate of Fernando Henrique Cardoso (1999-2002),  when Brazil was hit by the devaluation of the Real and an electricity blackout that led to rationing for around nine months from July 2001. Only two presidential mandates in Brazil´s 125 years as a republic have registered lower economic results. One was that of President Floriano Peixoto (1891-1894), a military officer who faced a civil war situation when there was a naval revolt  in Rio de Janeiro and an uprising in the south of the country. The other was Fernando Collor (1989-1992), currently Senator for Alagoas state, who introduced unbelievable economic measures, such as confiscating savings accounts. “An apotheosis of mediocrity” is how Reinaldo Gonçalves, a professor at the Federal University of Rio de Janeiro (UFRJ), described growth in the Rousseff years. He compared the average expansion with that of the rest of the world which showed that Brazil was in a modest 119^th position in the ranking of 152 emerging countries.

Obviously, evaluating a government purely by economic growth is a false measure. Often the reforms made by one president only bring a better performance by the following government while other presidents make adjustments that reduce activity temporarily to resolve imbalances left by previous administrations. Therefore, the Rousseff government had to adjust, at least partly, the excesses of the last months of the Lula administration. However, this is not enough to explain the economy´s lack of response. Virtually no important reform has been made in recent years and the government´s interference in the economy has only served to heighten the climate of uncertainty and dampen investments.

The dilemma is that, along with this feeble performance, Brazil has done little to speed up the growth rate in recent months. “The figures are worrying,” claimed Paulo Leme, head of Goldman Sachs Brasil. “As well as the low growth, we have seen the gross savings rate collapse to12.7% of GDP, a very low ratio that is below the rates of 19.5% for sub-Saharan Africa and 18.5% for Latin America. We are also seeing investments – the gross formation of fixed capital – declining, highlighting in dramatic fashion our preference for the immediate approach of consumption today at the expense of the future. The performance of these variables is caused by a single-minded economic policy of stimulating domestic demand which also explains the rise in inflation and the foreign deficit.” Without savings, there are no resources for more investment and the cycle of low growth is perpetuated. Leme says the result of these choices is falling productivity and a steep drop in the Brazilian economy´s potential.

It may be true, as Workers Party economist Maria da Conceição Tavares said recently that “no-one eats GDP”. However, with this mini-GDP, it becomes more difficult to fill the plate.

The presidents and GDP

The latest forecasts show that the Rousseff administration´s economic performance will only outpace that of the government of Floriano Peixoto and Fernando Collor (GDP variation, annual average)

Source: Ipeadata