Brazil’s slowdown gets even slower

Brazil’s slowdown just keeps getting slower and slower. Over the past few weeks, analysts have been furiously downgrading their GDP forecasts for the Latin American country in light of the fresh crisis in global markets.

Morgan Stanley became the latest to slash its numbers on Monday, reducing this year’s GDP growth to 3.7 per cent from 4 per cent and next year’s to 3.5 per cent from 4.6 per cent.
Brazil’s central bank survey on Monday found that forecasts for economic growth in 2011 fell for a third week to a median 3.84 per cent.

Last week, Goldman Sachs also cut its forecast to 3.7 per cent from 4.5 per cent for this year and UBS is now predicting GDP growth of only 3.1 per cent this year, down from 3.9 per cent.

Brazil’s government has continuously warned that the country is not ‘immune’ to events abroad but the latest bout of pessimism shows just how vulnerable Brazil is. Despite all the optimism about consumer demand and rising middle classes, Brazilian growth is still very much indexed to global commodity prices.

In fact, over the past two decades, Brazil’s exports have become increasingly geared towards raw materials such as soybeans and iron ore.

In value terms, only 23.31 per cent of Brazil’s exports in 1992 were classed as ‘basic products’. This year, around 47 per cent fall into that category.

Morgan Stanley analysts go even further, attributing the growth downgrades to the weakness of Brazil’s domestic industry. For over a year, they have been warning about a ‘growth mismatch’ in Brazil; the fact that higher consumer demand and retail sales do not necessarily translate to higher GDP.

“We thought people were misunderstanding the mismatch between very robust consumer demand and sluggish domestic production,” says Gray Newman, the economist for Latin America at the bank. “Yes demand is there, but it is being met by imported products.”

The latest troubles in Europe and the US may well prove to have been exaggerated by global markets. But the huge impact they have already had on Brazil’s growth forecasts should serve as a warning about what could happen to the country if commodity prices were to take an even bigger hit. If China’s economy, for example, encountered a hiccup, let alone stalled, Brazil’s party would be over pretty quick.