BRASILIA (Reuters) - Brazil may be growing at Chinese rates but it is no China.
President Luiz Inacio Lula da Silva praised this week’s gross domestic product data, calling it well-deserved “exuberant growth,” but some say such rampant expansion could be a curse, not a blessing.
Sound economic policies have made Brazil a magnet for investment but now Latin America’s largest economy is facing a collision with old problems: a chronic lack of infrastructure and human capital.
Brazil lacks the infrastructure and factory capacity to cope with these growth levels without fueling inflation, analysts say.
It also cannot match the massive and highly qualified work force and the amount of investment in infrastructure and capital goods that has allowed China to sustain double-digit growth rates.
“We have clear bottlenecks and our daily lives are evidence of this,” Roberto Padovani, chief Brazil strategist at WestLB in Sao Paulo, said. “It is difficult to find workers, you don’t have enough streets and highways, the airports are a mess.”
Investment, a gauge of corporate and public capital spending and inventory build-up, is currently at 18 percent of GDP, less than half China’s investment rate of around 40 percent, said Marcelo Carvalho, chief Brazil economist at Morgan Stanley in Sao Paulo.
And China invests around 16 percent of its GDP in infrastructure in contrast to only about 2 percent in Brazil, he said.
“If you don’t invest enough you are not expanding the supply side of the economy fast enough to cope with this booming demand. So when demand is growing faster than supply it spills over into pressures on inflation,” Carvalho said.
Brazil’s economy grew at its fastest pace in at least 14 years in the first quarter of 2010, up 9 percent on an annual basis. That was only moderately below China’s 11.9 percent growth rate in the same period.
The growth data gave another confidence boost to a government facing a tight election race against opposition party PSDB in October. Lula spoke of a “golden age” for Brazil, and Central Bank President Henrique Meirelles said it proved the government’s anti-crisis strategy was right on the money.
But for others, Brazil’s buoyant growth raises a red flag: inflation.
BLESSING VS CURSE
Economists say Brazil can only grow between 4 percent and 5 percent before growth starts fueling inflation and hurting the current account, the widest measure of a country’s foreign exchange transactions.
With the economy expected to expand between 6 percent and 8 percent this year, it is clearly growing above potential.
In a sign that Brazil’s resources are being stretched thin, unemployment dropped in April to its lowest rate for that month since 2002, when the government began tracking the data.
And the combination of strains in supply and red-hot demand resulted in growth of imports outstripping that of exports, widening the current account deficit.
The use of installed factory capacity also reached pre-crisis levels in April as Brazilian manufacturers pushed equipment and personnel to produce more.
“Current output is about 1.7 percent above potential, confirming that the output gap is now negative, and that means that inflationary pressures are mounting,” Standard Chartered said in a note published on Thursday.
Headline inflation slowed in May, but underlying price pressures remain strong.
Core inflation, which strips out the prices of food and other volatile goods, jumped to 0.59 percent from 0.45 percent in the previous month, and 12-month inflation at 5.22 percent remains well above 4.5 percent, the center of the government target.
Inflation is also accelerating in the services sector, which makes up about two-thirds of Brazil’s economy, according to Carvalho. Prices in the sector grew around 0.6 percent in May from a 0.5 percent rate in April and surged 6.78 percent year-on-year in May, he said.
The government has taken steps to curb pricing pressures, announcing additional cuts to the 2010 budget, while the central bank has increased interest rates by 150 basis points since April to 10.25 percent.
Brazil’s finance minister, Guido Mantega, expects those hikes, along with the phase-out of government tax breaks and the euro zone debt crisis will help cool growth in coming quarters.
But if underlying price pressures show anything it’s that monetary authorities still have work to do.
“Inflation numbers in services are a closer reflection of the domestic economy than overall inflation numbers are, and services are running above target,” Carvalho added.
“It means there are inflation pressures that have to be dealt with. It means that the central bank’s monetary tightening job is not over yet.”
Editing by Leslie Adler
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