Structural reforms must be tackled...

The Brazilian economy is recovering in earnest, after a few years of lacklustre growth. GDP is bouncing back more strongly than anticipated.

Domestic demand is strengthening and has taken over from exports as the main driver of economic growth, making it more balanced across sectors. Household spending is also recovering, pushed by the expansion of credit and an increase in jobs.

Unemployment is also falling and real wages are on the rise, while investment is growing as the business climate has improved. Meanwhile, agriculture and manufacturing continue to perform strongly, while the services sector is also growing faster on the back of the recovery in private consumption.

The external sector is in good shape. The trade and current account balances have strengthened beyond market expectations. Export performance remains robust, due to the recovery in the global economy and increased penetration in new markets such as China.

Strong domestic demand and the recovery in industrial production have boosted imports but the trade surplus remains healthy. Financial market conditions are favourable: sovereign risk premiums have come down, and credit ratings have been upgraded.

The burning question at present is whether Brazil is embarking on a virtuous circle of sustained growth, or whether the recovery is a temporary result of the upswing in the current economic cycle.

This is not an easy question to answer. But our view is that the foundations for sustained growth appear, by and large, to be in place.

The continuing improvement in the current account balance is making the economy more resilient to changes in market sentiment.

The maintenance of a freely floating exchange rate has been essential. This is important because the external sector has traditionally been Brazil’s Achilles Heel.

(From InfoBrazil, Dezembro 13, 2004)

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