Carnival Rio de Janeiro: What It Says About Brazil's Future

Beads on, beer in hand, surrounded by topless men and women, I paused my Saturday night Mardi Gras festivities in New Orleans to think about Brazil and the implications of the recently released economic predictions for 2013.

Okay, you got me, I didn’t really do that. I continued having a fun time along with everyone around me. However, I am thinking about it now and predicted low growth, drought, and risk of rising inflation are among the chief concerns for the coming year. While the exact predictions may vary, the consensus seems sobering for 2013.

Brazil recovered from the recession ahead of its peers, achieving 7.5% growth in 2010. Growth has since cooled to 2.7% in 2011 and a disappointing 1.5% in 2012. Predictions vary for 2013. The Finance Minister and Treasury Secretary predict 4% growth, the Economist says 3% is more realistic, and some economists predict as low as 1%.

Part of the growth problem is the continued risk of inflation, which reached a 10-month high of 5.8% in December and tempers further stimulus efforts and interest rate cuts. Unfortunately, planned cuts to energy tariffs that were meant to help curb inflation might not happen because of continued severe droughts. The majority of Brazil's power comes from hydro-electricity.

Unemployment is at a historic low (below 5%) but it may be unsustainable, as wages become less competitive and businesses hang on to employees longer than necessary to avoid the short-term costs of releasing them. If the unsustainable predictions are correct, one of Brazil’s brightest economic features would become another concern.

Of course, Carnival will help this quarter, adding an estimated $628 million to the economy and 250,000 temporary jobs. But this isn’t exactly unexpected income, nor does it have any significant broader economic implications outside of its earnings and temporary job creation.

Despite the negativity from international economists, including the interest rate and water concerns, Brazil’s finance minister, Guido Mantega, claims that Brazil’s competitive exchange rate, investment potential, and low tax burden will facilitate rapid expansion in the next couple years. As the biggest player in Latin America and the so-far disappointing Mercosur coalition, let’s hope that Mr. Mantega is correct.

Brazil has had much to celebrate in the past few years – quick recovery, high growth, winning the next World Cup and Olympics – but optimism is tempered for 2013. Does this mean that Brazilians should celebrate any less this Carnival? Of course not. But when the hangover subsides, Brazilians should be prepared for a sober 2013.