Benefits of Brazil’s Growth Start to Spread

Credit card There has probably never been a better time for a worker to find a good job in Brazil than at the moment. The economy is growing, shrugging off most of the fallout from the crisis in the United States, consumers are buying as if every week was Christmas, real pay is rising and millions have been moving up the social ladder into higher classes.

 Unemployment is virtually at a record low and jobs are plentiful. Social inequality and misery are still around, but millions have been taken out of poverty or given a helping hand thanks to the economic boom and government social security programs. How much credit should President Luiz Inácio Lula da Silva take for this situation? Quite a lot, but the truth is that Lula has had a lot of lucky breaks and he knows it.

The rise of China has created a market for all kinds of Brazilian goods. Chinese industry needs Brazilian iron ore and steel, farmers want fertilizers, while the food industry wants to feed China’s increasingly better-off consumers with Brazilian pork, beef and chicken.

China’s apparently endless appetite for Brazilian goods is one of the reasons why the current financial crisis, which has pushed the US economy to the verge of a recession, has had only a limited effect on Brazil. The idea that when the US sneezed the rest of the world caught a cold is no longer valid.

The International Monetary Fund has just lowered its estimate for world growth in 2008 from 4.1% to 3.7% and puts the chances of the world economy falling into recession in 2009 at 25%. It estimates that the US economy will grow by 0.5%, the Euro Zone by 1.3% and Japan by 1.4%.

Compare this with its estimate of 9.3% growth in China and you will see why the prospects for Brazil are buoyant. Compare the US’s feeble growth figures with Brazil’s increase of 5.4% in 2007 and expected increase of 4.8% in 2008. This may be a lot lower than China’s remarkable growth rate but it is still quite impressive against the current global economic backdrop.  

We only have to look back a decade when Brazil was a front-line casualty when the Russian, Asian and Argentinean crises erupted. Over that period, Brazil had to be bailed out on three occasions by the IMF.

Nowadays, not only has Brazil paid off all its debts to the IMF but has amassed a war chest of over US$ 180 billion to hold its own against speculative attacks on its currency. These foreign reserves more than doubled between December 2006 and December 2007 at a rate of growth that was twice as high as that of China and Russia.

This massive demand for Brazilian products has spurred companies to invest in new machinery and equipment and hire new workers. As these investments come to maturity, they will increase production and meet the soaring domestic demand.  Most of the jobs on offer are in the formal sector which means that companies are thinking in the long term. You don’t hire someone in Brazil, with all the complications and costs involved, if you are going to fire him the next day.

The easing of credit and falling interest rates has also helped boost the economy and given consumers the chance to buy products which were previously out of their reach. Millions of workers and pensioners are receiving credit through payroll loans where the money is deducted from their pay or social security checks.

At the same time, payback periods are being extended to as long as six or seven years. The result has been a massive surge in spending as people rush to the supermarkets, car dealers and real estate brokers to buy computers, TVs, electronic gadgets, automobiles and their own homes.

The latest figures for vehicle production, for example, show an increase of 19.3% in the first quarter of 2008 over the same period of last year. The number of units sold in this period came to almost 648,000, 31.4% higher than the same period of last year. Of these car sales, 70% are bought on credit.

The auto industry expects this trend to continue. The auto manufacturers trade association, Anfavea, says productive capacity will be increased from 3.5 million a year to 3.85 million in the second semester of 2008 and raised even further in 2009 to 4 million.

This rise in prosperity has raised literally millions of people from the lower class to the middle class. Studies by the official statistics agency, the IBGE, and the finance house Cetelem show that the middle class (the C class in the jargon and defined as having a monthly income of more than 1,062 Brazilian reais or around US$ 800) rose from 34% of the population in 2005 to 46% in 2007.

The lowest income group (the so-called D/E class) fell from 51% to 39% in the same period. This new middle class now consists of around 86.2 million people. The greatest dream of these people is to own their own home and 16% say they will try and do so this year.

No wonder banks are rushing to lend money to this group and homebuilders, which had previously concentrated on the upper-income groups, are racing to start new developments for those in the lower-income bracket.

There is, of course, a drawback to this rapid growth. The economy could overheat as rising demand outpaces supply. Factories are working flat out at record levels of use of installed capacity and the shortfall is being met by imports.

This is reducing Brazil’s trade balance which has fallen sharply in this first quarter and is expected to show a deficit for the first time since 2003 – of around US$ 14.5 billion compared with surplus of US$ 27 billion in 2007.

It is also leading to higher inflation which is threatening the official target of 4.5%. The result is that the Central Bank is likely to hike interest rates to cool things down.

This is a price which will have to be paid since, despite the good times Brazil is currently experiencing, the real world has an irritating habit of reminding you that good times do not last forever.

The finance minister Guido Mantega wanted to put some limits on credit since he feared the long payback periods could cause problems but he was slapped down by Lula who knows that the current spending spree reflects well on him and his government.

He has every reason to feel pleased since a recent opinion poll showed that 58% of those surveyed thought his government was doing a good job. His own personal approval rating jumped from 65% in December 2007 to 73% by the end of March 2008.

John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site He can be contacted at

© John Fitzpatrick 2008


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