In Brazil, rate cuts but no economic recovery

July 11, 2012

Brazil’s central bank meets today and almost certainly will announce another half point cut in interest rates, the eighth consecutive reduction since last August. But so far there is little sign that its rate-cutting spree — the longest and most aggressive  in the developing world — is having much success in resuscitating the economy.

HSBC’s closely watched emerging markets index (EMI), released this week, shows Brazil as one of the weak links in the EM growth picture,  with sharp declines in manufacturing and export orders in the second quarter.

The government is expected to soon revise down its 4.5 percent growth projection for 2012; the central bank has already done so.  Industrial output is down, and automobile production has slumped 9 percent in the first half of 2012. Nor  it seems are record low interest rates encouraging the middle classes to take on more debt — the number of Brazilians seeking new credit fell 7.4 percent in the first half of this year, the biggest fall on record, according to credit research firm Seresa Experian.

And investors aren’t too happy with Brazil either. Despite the steep rate cuts, Brazil’s stocks are among the worst performing in emerging markets this year. (See here for what I wrote on Brazilian stocks a few weeks back)

Grappling with the slowdown in China and other export markets, Brazil, understandably, is trying to stimulate domestic demand. But its problem (and indeed that of many others such as India) is that it is trying to repeat the strategy it pursued in 2009 when countries resorted to huge stimulus to kickstart growth after the Lehman Brothers disaster.  It worked back then but may not be quite so successful again, says Karen Ward, senior global economist at HSBC who worked on the EMI report. Ward notes that China, in contrast to Brazil, has been measured in its monetary easing this year, even though its growth too is slowing.

China learned its lesson from 2009 and is revamping its stimulus strategy but Brazil is back to doing what it did last time, trying to tempt the consumer, and it is not having the desired effect.  They should be thinking more imaginatively about the kind of stimulus they want. Brazil and India are trying to look at reviving third quarter growth but they should take a leaf from China’s book in terms of using fiscal policy more effectively to generate better quality growth.

Michael Henderson of Capital Economics points out that growth in recent years was propelled by a credit boom and commodity-linked inflows but neither of these factors is now in place. On the other hand, rates of savings and investment remain low at less than 20 percent of GDP (in Asia they are between 30-50 percent). He says:

Lower rates will help if businesses find it easier to get credit. But in the last few quarters, the credit cycle has started to turn, with a rise in bad loans…leaving the economy weaker. Loosening rates isn’t going to help too much when you are coming off a credit boom…it is debatable how much of a pickup they can create.


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