Brazil 2014: Growth Accelerates, as the World Cup Approaches

Will Brazil go back to faster growth in 2013? After two years of low growth, the IMF forecasts Brazil will return to its 3.5-4% growth path in 2013-2014 (World Economic Outlook Update, January 2013). The domestic macroeconomic context is favorable: economic fundamentals are good and economic policy actively sustains aggregate demand. However, structural constraints on the expansion of supply could hamper strong recovery in the short term.

Brazil has shown itself capable of using policy levers well, whether to withstand the world economic crisis or to keep inflation under control. The country is fiscally virtuous, while its trade surplus has shrunk due to the strong growth of imports. Although the current account balance has turned negative, inflows of foreign direct investment have more than covered the gap. In her first two years as head of government, Dilma Rousseff has put industrial policy at the top of the agenda, while continuing programs for social and economic inclusion of the urban poor, and strengthening programs to fight rural poverty. The objective of industrial policy is to increase the country's competitiveness in manufacturing, by increasing productivity, techonological intensiveness, and innovative capacity.

The Plano Brasil Maior 2011/2014 quantifies ten objectives, ranging from the increase in fixed capital investment to private spending in R&D, and from developing technology-intensive manufacturing products to innovation in SMEs. The government has also decided to accord preference to national products in various industries, including oil and urban transportation. Also monetary policy has been put to the service of the government's industrial strategy, by bringing interest rates to historic lows, and countering the appreciation of the national currency in order to help Brazilian manufacturing exports.

Rousseff's objectives however run up against constraints on the supply side, especially in terms of infrastructure (roads, railways, harbors, airports) and human capital. Aware of this shortage, the Brazilian government is developing partnerships with private businesses to invest the enormous resources needed to modernize and expand the country's communication networks. Filling the infrastructure gap will not only require money, but time, too. So Brazil might not attain the +3.5% forecasted by the IMF for 2012. The horizon is rosier for 2014, though. Not only because new infrastructure will be in place, but especially because the World Cup will drive domestic demand and because fiscal policy is likely to turn more expansionary in the year preceding the next presidential election.