Brazil's economy fizzles on eve of fall elections

  • Article by: THE ECONOMIST
  • Updated: July 28, 2014 - 6:16 PM

Confidence and growth are down, while public spending is up.

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Soccer fans watched the World Cup final between Argentina and Germany on a giant screen on Rio’s Copacabana beach.

Photo: Silvia Izquierdo • Associated Press,

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During the monthlong soccer World Cup, which concluded in Brazil on July 13, Rua 25 de Março, a tatty but popular shopping street in São Paulo, was a riot of yellow and green. It was hard to buy anything that did not come in the Brazilian national colors.

Now the flags and soccer jerseys are gone; the cheap bags and Calvin Klein knockoffs are back. Katia Maurício, who runs a stall full of T-shirts and headbands, is selling off the last of her World Cup-themed stock at a big discount. Business was good, she said. “But it will go downhill after the election.”

It is already heading that way. Business confidence has sunk to levels not seen since the depths of the global recession in 2009.

Annual inflation among items whose prices are set by the market, not the government, stands at over 7 percent. Economists are busy slashing growth forecasts for 2014 to 1 percent or below. Analysts at Morgan Stanley see echoes of another 7-1, the score line when ­Brazil was drubbed by Germany in the World Cup semifinal. The more sensitive souls at Goldman Sachs warn of “stagflation.”

Manufacturing payrolls contracted in June for the third straight month, the first time this has happened in half a decade. Capacity utilization, a measure of how much of the country’s industry is busy, has tumbled.

After three years of anemic growth, “industry has finally thrown in the towel,” said Arthur Carvalho of Morgan Stanley.

The unemployment rate is low. But with job prospects dimming, consumers, who have pulled the economy along in the past few years, are growing more downbeat. Last month, 11.4 percent were more than 30 days behind on their debt payments, up from 9 percent a year earlier. Retail sales have flagged.

Sagging confidence poses the biggest threat to President Dilma Rousseff’s chances of a second term in an election this October.

In an effort to prevent voters from feeling the pinch, Rousseff has loosened the fiscal reins. In May, public spending was 16 percent higher than a year earlier and revenue 8 percent lower. As a result, Brazil posted its second-worst monthly primary budget deficit (that’s before interest payments) ever.

“They are trying to mask the problem until after the election,” Maurício said.

If so, it isn’t working. The president’s lead in opinion polls has been shrinking steadily. A survey released by Datafolha, a research firm, on July 17 showed only a 4-percentage-point advantage for Rousseff in the event of a second-round runoff with Aécio Neves, her principal challenger. In February, her lead over Neves in a second round was 27 points.



Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.

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