| SAO PAULO
SAO PAULO Brazil's economy, until recently a star performer among emerging markets, is now expected to grow barely more than 1 percent this year, piling pressure on President Dilma Rousseff to improve its performance.
Here are five weaknesses and strengths of Brazil's $2.5 trillion economy:
1. High business costs
Brazil is the land of $50,000 mid-size sedans, $1,100 iPads and $50 steaks. The problem is so pervasive that locals have a name for it -- the "Brazil cost".
There are several underlying causes. Infrastructure spending failed to keep up with the booming growth of the past decade, putting huge strains on roads and ports. That means farmers often proportionally pay four times as much to get their goods to port as their U.S. peers.
Another reason is taxes. Brazil collects about 35 percent of its economic output in taxes, far above the Latin American average. The tax code is also complex, forcing companies to spend on average 2,600 hours every year calculating what they owe. That is 14 times the typical time burden in the United States and by far the highest in the world, according to the World Bank.
2. A weary consumer
A huge part of Brazil's success story over the past decade was an expansion in consumer credit, which gave many people access to cars, TVs and other goods for the first time. But there are signs the spending spree is shifting into a lower gear, perhaps for years to come.
Brazilians now spend about 22 percent of their household income on debt service -- a level analysts say doesn't indicate a bubble, but doesn't leave much room for expansion. Default rates have also stayed at record highs this year despite resilient wages and a strong job market.
3. Surprisingly little trade
Brazil is perhaps best known abroad as an exporter of commodities such as iron ore, orange juice, beef and soy. So people are often surprised to learn that Brazil is the most closed major economy in the Western Hemisphere, with trade accounting for just 25 percent of gross domestic product.
High tariffs and a lack of trade agreements mean Brazil is essentially a large, self-contained domestic market. That has helped nurture a vibrant manufacturing base, but it also makes it harder for Brazil to find other sources of growth when consumers are fatigued, as they are now.
Comparatively open economies on Latin America's Pacific coast, such as Mexico, Chile and Peru, are expected to grow much faster than Brazil this year.
4. Tight labor markets
Despite two years of slow growth, unemployment remains near a record low of 5.3 percent. Companies have therefore struggled to find qualified workers, and must pay higher wages to keep the employees they have -- another big cause for the "Brazil cost".
A dearth of skilled labor has also been blamed for delayed construction projects as Brazil prepares to host the 2014 World Cup soccer tournament and 2016 Olympic Games.
5. President Rousseff's economic management
Brazil's left-leaning leader has tried to revive the economy by weakening the currency, dishing out tax breaks, and creating conditions for an historic drop in interest rates. But many investors have criticized her actions for their unpredictability and seeming randomness, and have soured on Brazil as a result.
Investment fell 2 percent from July through September, and has now declined for five straight quarters.
1. Optimism about the future
From the executive suite to the corner market, many Brazilians seem to believe the recent struggles are just a pause in their country's emergence as an economic power. Especially among the 40 million people who have left poverty in the last decade or so, their belief in the future remains unshaken.
That has translated into buoyant consumer confidence and likely explains companies' hesitance to lay off workers. As a result, Rousseff and her economic team expect activity to resume a brisk expansion once they finish tackling some structural bottlenecks.
2. Stable government finances
A decade of solid fiscal management has left Brazil with a financial position that is the envy of the United States and most European countries. Its net debt-to-GDP ratio is slightly under 40 percent, and has steadily fallen in recent years.
Part of Brazil's relatively rosy standing can be chalked up to favorable demographics, with a median age of 29.6 years -- compared to 37.1 in the United States and 43.8 in Italy. Brazil may inevitably face the financial perils of a graying population but that's still two or three decades off, most analysts say.
3. More normal interest rates and currency
Until recently, Brazilian consumers on average paid about 40 percent interest for their debt -- an astonishingly high figure that was a legacy of the country's runaway inflation in the early 1990s. Credit card rates often ran into the triple digits.
Interest rates are now coming down across the board, which should allow for more sustainable consumer spending over time -- plus a broad reallocation of capital away from government bonds and into more productive investments.
A 27 percent decline in Brazil's currency since last August has also made the real seem less overvalued, helping shield industries from a flood of imports.
4. Industry turning around
Recent data suggests that Brazilian manufacturers, which have had stagnant output for most of the past five years, are finally starting to turn around. Industry grew 1.1 percent in the third quarter, its best performance since early 2010. Manufacturing expanded in November at the fastest rate in nearly two years, according to the HSBC Purchasing Managers' Index.
Finance Minister Guido Mantega said last week that, because of industry's large role in Brazil's economy, the factory recovery should spur higher investment throughout the economy.
5. President Rousseff's economic management
That's right, this one can be viewed as a strength, too.
For all the misgivings about Rousseff's interventions in the economy, many Brazilian and foreign investors believe they will yield solid growth once a rocky transition period is over. Her willingness to buck hard-left elements in her own party, and get the private sector more involved in highway and airport construction, for example, have fueled hopes that she is pragmatic enough to solve many of the country's bottlenecks.
(Editing by Todd Benson, Kieran Murray and Andrew Hay)