Brazil struggles to revive growth

More than any country, Brazil is using all instruments tools to stimulate economic growth. Yesterday, more steps were given in order to revive the country’ economy: Brazil’ central bank reduced its benchmark Selic interest rate by 50 basis points to 7.5%, a historic low. At the same time, the central bank signaled another cut might happen in October.

Brazil’s central bank is the first of its peers in the major economies to start to reduce interest rates sharply in order to fight against its economy slowdown caused by a previous rate tightening cycle and the eurozone crises. Just to have an idea, over the past year, the government has lowered borrowing costs nine times to revive economic growth. The central bank cut the country’s interest rate by 500 basis points, more than any other group of 20 nations.

The global slowdown has hit Latin America’s biggest economy hard. After growing 7.5% in 2010 and 2.7% in 2011, Brazil’s GDP might grow just 2.5% this year according to International Monetary Fund (IMF) growth forecasts. The country has the lowest growth estimate compared to its peers in the BRICS group—the major emerging markets composed by Brazil, Russia, India, China and South Africa.

This week, the Brazilian government had already announced more economic incentives: a two-month extension of tax breaks for new cars. The measure would expire this month. The finance minister Guido Mantega also extended to the end of the year tax relief on white goods such as washing machines, refrigerators, stoves and dishwashers. The Brazil’s development bank (BNDES) also announced new credit lines for capital equipment.

The last figures about Brazil’s economy show that the country has been recovering: retails sales increased while unemployment figures diminished. Retail sales grew 1.5% in June and vehicle sales surged to 364,196 units in July, the most since December 2010. At the same time, the central bank indicator for gross domestic product increased 0.75% in June compared to May, which suggests stimulus efforts are beginning to flourish.

Brazil’s economy is starting to show the first signs of recovery, but it is still fragile. While the government is using all its instruments to put growth on track, the inflation outlook is deteriorating. The central bank has been reiterating that inflation will slowdown and it will converge to 4.5% target by the end of the year, but the convergence will not be linear. However, economists have been increasing their forecasts’ inflation to 5.5% until the end of the year.

Brazil’s economic recovery can be beneficiated by the expected stimulus measures from the US Federal Reserve, which will likely help speed up growth in the biggest economy in Latin America. It’s time to wait and see…


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