Brazil: Stability Pays off – Strong Growth, but also Major Challenges Ahead

As recently as ten years ago, hardly anyone would have believed that overall, Brazil would emerge relatively unscathed from a crisis on the scale of the latest global economic and financial problems. In previous periods of crisis, no matter whether caused by external shock or due to home-made problems, the largest economy in Latin America has more than once been on the brink of default. The key factor in this rising ability to cope with crisis is the stability-oriented economic policy of the past decade. The foundations of this policy were laid by Fernando Henrique Cardoso, initially during his term in office as Finance Minister (1992-1994) and subsequently as President (1994-2002).

Brazil has of course also felt the effects of the global economic and financial crisis. In the fourth quarter of 2008, real GDP posted a 3.3% decline against the previous quarter, after seasonal adjustments. Economic output fell again by 1.5% in the first quarter of 2009. Thanks to the stable macroeconomic framework and the associated high credibility of the economic policy, however, policymakers were able to respond swiftly to the crisis with anticyclical measures. This economic policy stimulus proved effective. Brazil's recession came to an end as early as the second quarter of 2009, when the economy grew by 1.5% in comparison with the previous quarter. Since then the economic momentum has continued to pick up speed. In the first quarter of 2010 GDP climbed by 2.7%. This is the strongest quarterly rise in six years. Growth was once again driven by private consumption and investment, with the latter up 7.4% on the preceding quarter.

After a buoyant first half-year we expect economic momentum to ease somewhat during the rest of this year, not least against the background of an economic policy that has an increasingly dampening effect. In real terms the Brazilian economy should grow by 6.5% overall in 2010, after a slight decline of 0.2% in 2009. We then expect a rise of 5.5% for next year. This means that the largest economy in Latin America would grow more strongly than the region overall in the foreseeable future, for which we forecast growth of 4.6% this year and 4.4% next.

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