Throughout 2011 Brazil has experienced many economic ups and downs. Its stock market, the Bovespa, saw its value drop 29% from the end of 2010 to early August and then rally 20% from October to November; Inflation, reached the government’s upper band of 6.5%; The Real, climbed to 1.53 per US Dollar and then dropped to a 2 year low of 1.90; and GDP while strong was for most of the year revised downwards by economists. In November the data released by the Central Bank of Brazil showed that economic growth was still decelerating with GDP growth for 2011 forecast to be at 3.2% and 2012 at 3.5%, compared to 7.5% for 2010. With an economic crisis occurring in Europe and a stagnant economy in the US, Brazil in 2011 has very much been feeling the effects of the cold its largest trading partners have caught.
For 2012, however, we believe the outlook for the Brazilian economy is very positive. As the economies of developed countries have slowed the Brazilian government has taken a very proactive approach in helping support the domestic economy. As we saw in the latter part of 2011 the government was very quick to step in with interest rate cuts (even in a high inflation environment) and new tax cuts designed to help boost and protect local businesses. With the government leaning towards even more interest rate cuts to help support economic growth and with inflation looking like it will decline we should see more positive signs coming from the Brazilian economy as lower rates ease pressure on consumers and businesses alike.
In 2012 there will still continue to be a lingering fear of inflation. Even though inflation forecasts have been brought down Brazil’s use of reduced interest rates to help stimulate economic demand in an economy that cannot adequately supply its own domestic demand could lead to a reappearance of unwanted inflationary growth. Strong demand pressures resulting from the effects of a low employment, robust credit growth, supply constraints and large infrastructure bottlenecks could hamper Brazil’s efforts to keep inflation under control.
Asset bubbles are another worry for the booming Brazilian economy. As massive inflows of cash make their way into the country the abundance of cash has helped fund more bank loans and fueled a potential real-estate bubble. In Sao Paulo alone the price of newly constructed apartments has gone up 31% in the last year and price in some of the more luxurious neighborhoods experienced more than 50% increases in value. Although household indebtedness and debt servicing costs relative to income are increasing Brazil still finds itself in a relatively safe situation as most of its consumer debt is very short term in nature and at very high interest rates, which means consumers can only take on so much debt. Mortgages, although becoming more popular, are still at a low level compared to most developed countries.
Looking further into 2012 as Brazil grows and demand follows suit more investment will surely be needed to keep up. With the FIFA World Cup only two and a half years away, the Olympics 5 years and a giant oil reserve that has yet to be tapped major investments will continue to be made in the areas of infrastructure, telecommunications and energy leading to continued growth for years to come.