Just when it seemed the Brazilian economy was impervious to a year of non-stop stimulus policies, the recovery finally looks to be underway - this time, for real. Optimistic Brazilian policymakers have been forced to repeatedly slash their growth expectations over the last year and a half after spikes in economic activity turned out to be short-lived.
Now, members of President Dilma Rousseff's economic team tell Reuters they are confident the economy grew more than 5 percent in annualised terms in the third quarter, after a barrage of tax and interest rate cuts sparked a surge in sales of everything from cars to freezers. In the second quarter, the economy had expanded at an annualized pace of only 1.6 percent. "The recovery is here, there is no doubt about that," said one official, who asked for anonymity.
Still, Brazil is not completely out of the woods. A fragile global economy, plus severe infrastructure bottlenecks, sluggish investment and continued uneven performance by manufacturers at home are the main obstacles ahead. In 2012 the economy is likely to expand only 1.5 percent even with the improvement in the final months, but officials expect growth of about 4 percent in annualized terms in the fourth quarter and 4 percent growth throughout 2013.
Independent economists also see a solid rebound ahead in Latin America's biggest economy, according to a Reuters poll of 36 banks earlier this month. The median forecast for growth in 2013 was 4 percent and French bank BNP Paribas was even more optimistic, forecasting a 5.5 percent expansion. Investors and officials had become anxious after a year of aggressive fiscal and monetary stimuli failed to revive an economy that nearly stagnated after growing a staggering 7.5 percent only two years ago.
Driving the recovery were auto sales that surged by 15.3 percent in August to hit record highs while retail sales remained surprisingly robust for the third straight month. Foreign investment in factories is rebounding and for the first time in over a year the manufacturing industry added most of the new jobs to the economy in September, in signs that the worst may be over for an industrial sector that has been the main drag on the economy. A pick-up in consumption helped Brazil's biggest retailer, Grupo Pão de Açúcar, post stronger gross sales and higher net revenue in the third quarter. Brazilian planemaker Embraer has said government tax incentives helped improve its profitability in that quarter.
Meanwhile, Rousseff and her aides are working hard to keep confidence levels high - and thus shield the recovery. The trained economist herself announced to a crowd of auto executives on Wednesday what is expected to be the last extension of the temporary tax cut for carmakers. The tax break reduces the price for consumers by about 7 percent - an incentive credited with the recent recovery in the industry. Finance Minister Guido Mantega did his share this week by saying the government will keep the local currency stable at any cost, which would help ease costs for a local industry struggling with a flood of imports.