Losing the gold medal in football – and economics

August 14, 2012

Noe Torres and Jean Luis Arce contributed to this post. Blog updated Sept 5 to add Q2 GDP data for Brazil and Mexico.

Three weeks ago, Mexico beat Brazil on Saturday to win its first-ever men’s football Olympic gold medal. What does that have to do with economics? Maybe nothing. But as The Economist notes, Mexico’s victory might just prove “just a warm-up for more good results to come” — on the economic field.

Mexico’s economy grew 4.1 percent in the second quarter from the year-earlier period. Even considering a mild slowdown from the previous quarter due to weaker U.S. demand, this growth pace far outshines Brazil’s lackluster performance since mid-2011.

Global manufacturers such as tire maker Pirelli and Volkswagen’s luxury car maker Audi have recently looked to Mexico as an alternative to China. Bucking a global trend of manufacturing weakness, Mexico’s industrial output jumped 1.3 percent in June from May, exceeding forecasts of most economists surveyed by Reuters.

Brazil, host of the 2016 Olympic Games, has been spinning its wheels as local manufacturers struggle with clogged roads and ports, exorbitant taxes and an overvalued exchange rate. Even with record low interest rates, Brazil’s economy expanded just 0.5 percent in the second quarter from the same period a year earlier, below the median forecast in a Reuters poll with analysts.

President Dilma Rousseff’s government has aggressively tried to rekindle growth by providing tax breaks and launching a $67 billion plan to revamp the country’s decayed roads and railways. Other steps are in the pipeline and may be unveiled in September. But so far, many of these measures – especially her failed efforts to cut banking spreads – have been perceived purely as government meddling in the private sector, diverting many equity investors to Mexico since the beginning of the year.

Against that backdrop, Nomura fixed-income analysts say Mexico may surpass Brazil as Latin America’s largest economy by 2022.

We do believe that the recent relative outperformance of the Mexican economy in relation to Brazil could prove to be long lasting. If Mexico’s star indeed rises, it would be a story based on flexible capital and labor markets, prudent fiscal and monetary policies and importantly without the help of a super-cycle in commodity prices.

This is not a settled case. Many economists see Brazil bouncing back in 2013 with 4 percent growth, though not without a spike in inflation. But few in São Paulo, Brazil’s financial capital and one of the world’s most crowded cities, dare to predict another long period of stellar growth without a much-needed overhaul of the country’s byzantine tax system and a marked improvement in education.

Writes Neil Shearing , chief emerging markets economist at Capital Economics in London:

As things stand there are few signs that Congress is willing to enact the structural reforms that the economy needs. As such, we fear that the current slowdown may ultimately prove to be the dawn of a new era in which growth of 3.5 percent or so a year becomes the new norm.

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