Publicado por: Guilherme Byrro Lopes | 13/06/2010

The unbearable exuberance of the GDP


In an attempt to share my vision of the state of some economics issues, this post will be in english, for the non-portuguese speakers public as well. The theme: the evolution of the Brazilian GDP and the “exuberant” result in the first quarter of 2010 (expression used by “the man” Lula, brazilian president).

Brazil is being considered a very solid emerging market and that is driven mainly by the macroeconomic stability and by its GDP growth rate. What is the meaning of macroeconomic stability in Brazil? First of all, since the transition of the national currency to Real (in 1994), the big fear of inflation is now under control. After long years of “nearly-fixed” exchange rate 1:1 of BRL/USD (although that strategy required great amount of international reserves). This rate was necessary to bring the inflation to lower levels then before and since 1999, we now have a floating exchange rate. That is mainly due to the lack of reserves to sustain this policy and because the president was then re-elected, so it was easier do devaluate the exchange rate (very unpopular measure, 2BRL/1USD). With a floating exchange rate, the forces of the market now drive the value of the exchange rate (with the intervention of the Central Bank sometimes). The second characteristic of the macro stability is the inflation target policy, aligned with the policies in other countries, that pursuits a given target of inflation using monetary policies, like interest rates. The last characteristic is the primary fiscal surplus (the surplus before interest payments made to service public debt), guaranteeing then that we could honor our debts (since we were not having a very good record of paying them). Long story short, the macro stability and serious policies to keep it this way allowed investors to put more money in the country (through physical investments and stock market), allowed brazilian companies to plan better (less uncertainty in the economy), increased the purchasing power of the people in general (specially the poor) and gave a lot of credibility to the “laid out eternally in a splendid crib” giant.

What to say then about the GDP performance? Given a scenario of stability, the inflation control permitted the ease of credit in the country (because real income was rising and default risks decreasing), the actual government spending with social policies (necessary, but very messy), the actual government spending with the hiring of public servants (a hiring spree one could say, inflating the inefficient public sector because he believes that a large share of the government in the economy is better), the modernization of industrial park (specially in the period before the currency depreciation (and that means before Lula), allowing imports of capital goods and technology), the growth of foreign direct investment (due to more confidence in brazilian economy and its potential of domestic market), the heavy inflow of dollars also coming from agro-business exports (also contributing for national reserves to grow and lowering risks of domestic ability to face crisis) are only a few of the factors that contributed to the development of economy since the new currency (real). All that because of macro stability (the base for the good economic performance) and expansionist fiscal policies (the extra push over natural rate of the GDP).

Only after that can we analyze the last results of brazilian GDP. In 2010, the GDP of the 1st quarter (Q) grew 2.7% over 4th Q 2009. The so-called annualized rate (that means the economy shows 4 quarters of the 2.7% growth quarter-0ver-quarter (QoQ)) is 11.2%. It is necessary to remember that the healthy (natural) growth rate is around 5% , meaning that the healthy QoQ growth rate is around 1,23%. EVERYTHING that exceeds this is inflationary and most likely to be fought with monetary policies (interest rate is the main tool). The 9% growth YoY (it is said to be chinese-like growth) is based on a recession GDP (in 2009), it is not sustainable, it is a mere and simple math operation that needs to be better analyzed.

For the graph presented bellow, I do not intend to give any perspective of sectors performance or to extend myself in the composition of the GDP, the simple agregate GDP is self-explanatory. The nacional statistics department (IBGE – in english) report the GDP volume index (1995 =100), that is show in the graph (only considering the Q1 performance). Only by looking at the GDP since 2003, it is very easy to see that it felt in 2009 and grew back in 2010. The annual growth rate of the GDP YoY shows that from 2005 to 2008 the rate was accelerating and this due to the extra-push in the product because of government spending. Because of the recession of 2009, the GDP felt -2.1% and in 2010 it was accounted 9% over 2008 (second row of the table). In the third row, I present the annual growth of the GDP in Q1 of 2010 starting in the year presented on the table, that means GDP grew at 9% in Q1-2010 over Q1-2009. The same is valid for the other growth rates, meaning that the annual growth of the GDP was 3,3% a year since 2008, or 4,2% a year since 2004. This is consistent with the perception that the natural growth rate for the brazilian economy is around 5% (less then 5% is a better guess). Of course we cannot project a linear growth rate for the next years, but the all growth over 5% will be inflationary in the country. This is why the Central bank has already started to raise interest rates, 1,5p.p. total in the last two decisions, to the highest real interest rate in the planet.

Brazilian GDP Development on Q1-2010

I would recommend people to analyze always this numbers with some suspicion, because some of economic results in Lula’s government are very pressured and future-problem-creating. The good thing is that this will affect a lot more the next president, so he will be able to sustain his 80% popularity. The chinese-growth speech for 1 quarter is very nice for those who doesn’t know that China presents this average annual growth rate for more then 30 years, and ours is not even sustainable for 1 year. So exuberant, so unbearable.


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