Brazilian economists and sociologists have been warning that the choice by the Brazil government to stimulate growth through consumption may have unintended consequences.
Cláudia Sciré, a sociologist who wrote a book entitled, Popular Consumption, Global Flux, says that for many Brazilians the journey out of poverty that is supposed to be an upward ascension into a new middle class has become a downward slide into a financial dead end.
Sciré points to studies by Marcelo Néri, an economist at the Getúlio Vargas Foundation (FGV), and Ricardo Paes e Barros at the Secretariat for Strategic Affairs housed in the Presidency of the Republic.
“This process deserves a closer look and some questions need to be asked,” says Sciré. “Are these people no longer poor? Is access to cultural events and quality education still difficult? Consumption alone is not an adequate parameter,” she declares.
Sciré questions the whole idea of whether or not this ascension into the so-called “Classe C” and the resultant indebtedness is sustainable where there has been an increase in income and consumption over the last decade. “We do not really know what is going to happen,” she says.
Uncertainty regarding the capacity of indebtedness and the efficiency of consumption as a stimulus also worries Fabio Giambiagi, an economist and one of the authors of Além da Euforia – Riscos no Plano Econômico.
“In spite of falling interest rates, Brazil’s interest rates remain much higher than in other countries. The result is that indebtedness in Brazil tends to siphon off a greater part of worker income. The payments Brazilians make on installment plans are just bigger than in most other countries,” says Giambiagi.
With respect to the recent decision by the Ministry of Finances to stimulate consumption to boost GDP growth through lower taxes on vehicles, for example, Giambiagi says: “The short-term logic is understandable. But in the medium- and long-term, it would be better to increase private and public sector spending.”
The recent decision by the Brazilian government to stimulate growth through consumption is a repetition of the recipe that was successfully used in 2009.
However, Sciré points out that the resulting increase in consumption in the lower social classes rearranged familial relations. The relationship between husband and wife shifted, as did that between parents and children.
In each case, the latter element in the equation gained more power in decisions on consumption. One of the reasons was the fact that husbands, old consumers, so to speak, had already acquired debts and bad credit records, while wives and children, new consumers, had clean credit records.
Sciré points out that in spite of the positive economic and social effects that access to credit can have, it can have undesirable consequences in the lives of the recently poor.
“Overnight, so to speak, these people have to deal with financial mechanisms that are very complicated even for people accustomed to them. People get confused. Installment payments may be small but the total cost is two or three times what a person makes.
“They get in debt, their lives are overshadowed by payment deadlines. There are grave consequences. They live in a time horizon that stretches only to the next monthly payment.”
Fabio Giambiagi, an economist, says growth based on domestic consumption has run into a wall. Domestic growth has slowed and the loss of rhythm is due in part to indebtedness by Brazilian families.
“The big difference in indebtedness in Brazil and elsewhere is the enormous hurdle that home ownership represents. My impression is that further indebtedness is not a good idea,” concluded Giambiagi.
The purchasing power of the lower social classes, known as “classes C and D,” also known as the new Brazilian middle class, has not jumped in spite of lower interest rates.
Economists says that the slowdown shows that the expansion of consumption that was to be spearheaded by the new middle class, although not exhausted, has run into a wall: family indebtedness.
This can be seen in Central Bank data on loans and financing operations by the financial system. In March they grew 1.7%. And in April, only 1.2%.
Fabio Gallo, professor at the Getúlio Vargas Foundation and an expert in credit, says that apparently we have reached the end of a cycle that began in 2009 when the government unveiled a stimulus package in the midst of the international financial crisis.
At this moment, says Gallo, the lower interest rates (including the benchmark Selic) and easier access to credit will have limited effects.
“Payment delinquency rates are at a record level (officially at 5.9% in March and April). At the same time, around 25% of the population is deeply in debt. Most of the indebtedness is exactly in the ‘Classe C.’
These are people who fudged the math when they bought a car without a down payment that was to paid off in 60 easy monthly installments,” says Gallo, adding that it is not just late payments that are the problem. “Even families who are up to date with payments have no way to take on further debt at this time.”
Gallo goes on to say that this credit bottleneck does not mean that the growth in the new middle class through a consumption model is outdated. “These measures may have the desired effect on the economy, but it will take time. Income must continue to rise and families have to pay off the debts they have acquired,” he concludes.
Newton Marques, a specialist in personal finances at the University of Brasília, also refutes the idea that the model is no longer valid. Economic growth based on Class C and D consumption continues to be possible, he says. “This is a moment of transition. It is a time for families to reorganize before credit moves through a new cycle of growth,” says Marques.
As for lower interest rates, Marques says that at the end of the day people will just get further into debt. “At the moment consumers can extend their debt at lower interest rates, debt capacity increases,” says Marques. And that is when families in the new middle class must be more careful with their finances, the economist concludes.