Brazil’s Economy Is Even Better Than It Looks

It’s June, traditionally the month for brides, grooms — and for economists to realize that they have once again been too pessimistic about Brazil.

For third consecutive year, the Brazilian economy is poised to grow faster than experts forecasted in January. Gross domestic product expanded 4% on an annual basis in the first three months of the year, and putting it on a path to easily beat the consensus forecast of just 0.78% annual growth at the beginning of 2023.

In fact, Brazil may be at the start of a virtuous cycle: favorable international conditions, receding inflation and interest rates, and a more constructive political environment.

Start with the external sector. With the reopening of China, Brazilian exports such as soybeans and sugar are booming, surging to a record of almost $340 billion in the past 12 months and marking an all-time high trade surplus. “There is no other emerging market that’s seen a transformation even remotely close to this,” says Robin Brooks, chief economist at Institute of International Finance and a long-time bull on Brazil.

Brooks has long argued that the fair value for the Brazilian real is 4.5 to the dollar — and investors have recently started to buy into his thesis, with the currency strengthening to 4.81 per dollar on Wednesday, the highest in more than a year. A more positive economic outlook in the US, as my colleague Jonathan Levin has written about, will help Brazil further.

Then there is inflation, which is trending down significantly, surprising analysts. Yes, there are caveats about the impact of tax cuts, and the core reading is still high (on which I urge you to read my Bloomberg Economics colleague Adriana Dupita). But the reality is that, at 3.9%, Brazil’s rate of inflation is lower than in most of its peer nations or even that of richer countries such as the US, Canada or Australia. It’s two-thirds the headline inflation rate of the euro zone. And inflation expectations have also improved significantly: CPI is now seen finishing the year at 5.42%, compared to 6.05% in late April.

So the central bank, which managed to tame price gains after they jumped to more than 12% in April 2022, should cut the Selic. It is currently at 13.75%, making Brazil the country with the world’s highest real interest rate at almost 10%.

Lowering rates will be crucial to help accelerate demand and alleviate indebted consumers. The labor market is also strengthening, with the unemployment rate falling to 8.5% in April, close to 2015 levels.

Unlike others in the region, Brazilian corporations are very sensitive to rate movements, so this excessive monetary tightening is hurting their balance sheets — and if borrowing costs fall, it will be a source of extra growth. Take Rio de Janeiro-based Yduqs Participacoes SA, a private education company that offers on-site, hybrid and distance learning.

The company is noticing a recovery in demand, particularly among lower-income customers, and expects a much better environment once the central bank starts to reduce rates, says Chief Executive Officer Eduardo Parente. Shares of the company have gained more than 70% since the start of the year on the expected consumer recovery and higher profits, and Parente says each percentage point of interest-rate reduction means 28 million reals ($5.8 million) in additional cash. “We are very excited with the country’s prospects for 2024,” he says.

Signs of this improved fiscal and monetary position led S&P Global Ratings on Wednesday to raise Brazil’s debt outlook to positive from stable.

Finally, there are also reasons to be optimistic on the political front. While Lula III appears to be a less patient, more dogmatic leader than Lula I, President Luiz Inacio da Silva’s leftist tendencies are tempered by a center-right congress. As the speaker of the house, the powerful Arthur Lira, told CNN Brasil recently, congress isn’t leftist but “reformist, liberal, talkative, that has its own positions.”

Translation: To have any chance of advancing his agenda, Lula will have to do the kind of political horse-trading that all presidents have had to engage in. Fortunately for him, the new framework from Finance Minister Fernando Haddad is likely to get the approval of congress, removing a big cloud over Brazil’s fiscal horizon. So even if Lula moves forward with his plans to tackle Brazil’s long-standing inequalities and social shortages — which, to be clear, need to be addressed — the country’s fiscal position should be protected.

As I have noted elsewhere, Brazil has in recent years benefited from its openness to new technology, recent infrastructure projects, the expansion of its capital markets and a more sophisticated business environment. All this is underpinning an economy that’s ready to soar.

Of course, I could be wrong. I still remember that (in)famous Economist cover from 14 years ago, showing Rio de Janeiro’s Christ the Redeemer statue taking off like a rocket — which was followed by the country’s worst recession in decades. Predictions about the Brazilian economy are perilous, for journalists as well as economists surveyed by the central bank in January. Still, it looks like a good moment for Brazil.

Elsewhere in Bloomberg Opinion:

• Lula Needs a Hug, Not Demands, From Biden: Eduardo Porter

• Social Media Firms Failed Once Again in Brazil: Parmy Olson

• Brazil, Yes Brazil, Points the Way Out of Inflation: David Fickling

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Juan Pablo Spinetto is a Bloomberg News managing editor for economics and government in Latin America.

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