The renaissance of Mexico and strong growth in the Andean countries have been casting an unfavourable comparative light on Latin America’s largest economy for nearly a year. But now weakness in the Brazilian economy is increasingly looking absolute and not just relative.
The linked challenges of political risk and a slowing economy have hit investor appetite at home and abroad. Investment – already at low levels – has stalled, slowing GDP growth to 1% in 2012. Consumption has become the government’s only policy to sustain growth, but that engine is spluttering, with consumers overleveraged and persistent inflation complicating demand-side initiatives. The central bank has belatedly begun to increase the Selic policy rate. It was raised 25 basis points to 7.5% in mid-April, a lukewarm response to inflation that now exceeds the target band of 4.5%, plus or minus two percentage points. Most economists had expected a 50bp rise to signal intent to the market, restore some of the bank’s credibility concerning its inflation-targeting mandate (although when did you last hear a central bank official even discussing the reduction of inflation to the mid-range target?) and have a stronger impact on the inflationary problems.
"The combination of weak growth and worrisome inflation, alongside interventionist policies, has dented foreign investor confidence.
