Highlights
– Lula announces he is optimistic about 2009 outlook
– Some Brazilian economists disagree, arguing indicators reveal an outlook of zero growth
– Despite Lula’s assurances, Brazilian economy likely to face significant downturn in 2009
On March 8, 2009, President Luiz Inacio Lula de Silva announced that he believes Brazil will rebound from the effects of the global financial crisis much faster than developed nations and expects 2008 fourth quarter gross domestic product (Q408 GDP) reports to reveal more than five percent growth for the year.
Until The End of 2008
Lula recently told mainstream media outlets that 2008 was “an excellent year” and argued that he remains optimistic for 2009. In a nationwide opinion poll taken in February 2009, President Lula received an approval rating of 84 percent.
Since the president came to power in 2003, Brazil has experienced sustained growth, increased exports, healthy external accounts, moderate inflation, a rise in employment, as well as a reduction in its debt-to-GDP ratios. Brazil’s economic advances have allowed the country to amass more than US$200billion in foreign currency reserves, enabling it to withstand some degree of economic volatility.
Much of the countries economic success through to the end of 2008 stems from its conservative fiscal and monetary policies, and from recent microeconomic reforms made by Lula’s economic administration.
• From 2003 to 2007, the Brazilian economy expanded at 4 percent, while growth across the developing world averaged 7 percent, largely attributable to the government’s fiscally conservative positioning.
President Lula indicated that Brazil’s 2008 GDP report, expected to be released in the coming days, would likely confirm that the economy grew by over five percent.
• Brazil’s economy grew approximately 2.8 percent in 2006 and 4.5 percent in 2007.
Vulnerabilities
Many Brazilians expect the economy to remain largely shielded from falling world demand and global credit shortages, as Brazilian exports equal only 14 percent of its GDP, while total credit prior to the crisis was only 30 percent of GDP.
Despite these rosy predictions, many Brazilian economists point to economic indicators revealing Brazil’s vulnerability to the crisis.
Economists from Morgan Stanley recently highlighted several indicators projecting zero growth for 2009:
• The fall in Brazil’s exports is larger than this sector’s proportion of GDP.
• Capital outflows are negative.
• The shutdown of overseas credit markets has caused crowding in the Brazilian market.
• A slump in business and consumer confidence has caused a sudden stop in commercial activity.
The Real, Brazil’s currency, dropped 32 percent over the previous four months to February. The drop resulted in the largest currency devaluation amongst the world’s 16 major currencies, when compared to the dollar. Industrial production slumped by 17.2 percent year on year, in January. On February 3, 2009 officials indicated that Brazilian industrial output experienced its largest decline in over 17 years.
Although employment rates were largely unaffected throughout 2008, more than 650,000 jobs were lost in December 2008, with an additional 100,000 lost in January 2009. At least two-thirds of the reported losses were caused by seasonal factors and many Brazilians are expected to return to the job market in the near-term following the annual Christmas-to-Carnaval festivities.
Outlook
President Lula highlighted his primary concern is to prevent the reversal of job creation and the economic security his administration achieved for “millions of the poorest Brazilians.”
A recent halt in business and spending activities in the Brazilian economy is now one of the countries largest economic threats. We believe that Lula’s close communication with mainstream media sources regarding the economic situation is an attempt to restore business and consumer confidence.
Despite the President’s assurances, we feel that Brazil will continue to experience significant economic slowdown, especially within its durable goods sectors in the near to medium-term. Additionally, we expect that President Lula will utilize national reserves to stabilize the Real and subsidize industry in the near to medium-term. If Lula disregards planning measures to account for an extended economic crisis, the lack of appropriate planning may cause a worsened employment situation and could result in public backlash against Lula’s Workers Party in the medium to long-term.