Brazil Growth Forecast for 2012 Cut to 3.8%

In a break from steady upward growth, the Brazilian economy screeched to a halt in the third quarter of 2011. Most industries posted losses and growth forecasts have been downgraded. The sudden slowing of the economy represents a turnaround for government economic policy, which had previously been using aggressive measures to fight what was seen as an economy too hot for healthy growth.

In order to continue economic growth, the Brazilian government is going to be forced to take aggressive action and respond to fears about its ability to stay competitive as an emerging market.

Leaders have tried to play off the GDP’s zero growth rate as a foreseen casualty of the turbulence of global markets and the euro crisis in Europe. The dollar has fluctuated the past month, reaching $1.90 to the Brazilian real and dipping to $1.69, before regaining its footing at a steady $1.79. The government has reduced its growth forecast for 2012 from 4.5% to 3.8%, again citing global causes, and has introduced a stimulus package that cuts interest rates from 11.5% to 11%. Interest rates have been high in Brazil because of widespread fear of inflation related to strong growth.

Brazil’s 7.5% growth in 2010 was the payoff that many people had expected for the macroeconomic stability of former Brazilian President Lula da Silva’s presidency. It served to both justify and fuel the optimistic climate about Brazil’s future political and economic global position. This optimism, as well as the largest discovery of oil fields in the Western hemisphere in the past 30 years, has allowed the Brazilian government to finally free themselves from the old saying that “the future is always tomorrow” and declare, as Obama did in his visit to Brazil, that “the future has arrived.”

But the slowdown has stoked some larger underlying fears about the nature of the Brazilian economy and Brazilian President Dilma Rousseff's ability to respond to a slowdown. The country was downgraded to 30 in the ranking of the fastest growing countries. And Brazil is behind all the rest of the BRIC countries in terms of growth: China continues to lead with a 9.1% growth, alarmingly ahead of Brazilian forecasts. Furthermore, memory of the country’s long history of rocky economic performance is never far off: Growth in the 50s and 60s reached over 7% but was followed by inflation and stagnation and decades of instability.

Brazil also joins the U.S. in its fears that it may be losing out to China. China is Brazil’s biggest trading partner, but they are also global competitors in the emerging market. Additionally, some economists fear Brazil’s succumbing to the “Dutch disease,” whereby a boom in natural commodities causes big declines in manufacturing.

But Brazil will finish 2011 as the world’s seventh largest economy. By 2025, it is expected to be the fourth largest. Dilma has recently been touting the “Brazilian model” as a solution to the euro crisis and she has received positive international press, with recent feature stories in The New Yorker and The Economist. Her government has shown a steady economic hand in dealing with the GDP’s slowdown. And although inflation is still worrying and the forecasted 2012 growth of 3.8% seems weak in compared to 2010’s performance, these are problems that most European countries would be happy to have.

Photo Credit: Wallance Ugulino