Their economy may have slowed and inflation may be rising, but that hasn’t deterred Brazilians from buying. Retail sales rose last month for the sixth time in a row, and were up 8.3% on a year earlier.
That’s great for retailers, but not so much for the economy as a whole. Brazil’s consumers contribute 60% of the country’s GDP. (In China, it’s just 35%). Brazil will soon be the world’s number two marketplace for beauty products and pet food. But As Juan Lorenzo Maldonado at Roubini Global Economics says, “consumption has been the only growth source for Brazil this year, as investment has receded and, on the supply side, industry remains a drag on the economy.” GDP grew at 7.5% in 2010, but it was 1% last year, and it remains tepid precisely because the government’s focus on consumption has come at the expense of investment, infrastructure, and the resolution of serious structural problems.
Maldonado says that a tight labor market, significant wage gains, stimulus measures initiated in 2012, and aggressive monetary easing are the reasons for continually high consumption. But more than anything, underpinning the Brazilian shopping binge of the last few years is the fact that so many new Brazilians—35 million—have entered the swelling ranks of the global middle class and gained access to previously unavailable luxuries such as stable employment, some savings, and most importantly, credit.
As a result, Brazilian credit makes up about 50% of GDP, says Maldonado, and households are spending close to 40% of disposable income on paying off debt, a sign that consumers are already over-leveraged.
The rising retail figures also show that Brazilian spending is not related to economic growth, and that consumers are spending in ways they can’t afford. In the North of Brazil, a poor region where many have been shuttled into the nascent middle class, it is not uncommon for Brazilians to shower five times a day, douse themselves in perfume, and apply lotion or skin cream after each shower. That has created a $43 billion dollar market for skin products, nearly twice as large as China’s.
Not surprisingly, credit defaults last year rose to the highest levels since 2000, and banks, as a result of higher risk perception, are more reluctant to lend.
So why has the Brazilian government been urging banks to make still more loans? Demand-led growth has worked well in the past. But political inertia has left the country stuck on policies designed to raise people’s standard of living; and stimulus measures that mandate lower rates for car purchases, or lower taxes on home appliances, can only do so much to boost growth. Meanwhile, an appreciating exchange rate, ongoing labor shortages, rigid labor laws, steep wage gains, a nightmarish tax code, and mounds upon mounds of red tape are all dragging down the supply side of the economy.
Brazil was until recently a powerhouse, an example of the lessons an emerging economy could teach the rest of the world. But last year it lost its position as the world’s seventh largest economy—to the sickly UK, entering its third bout of recession. Time for its policy-makers to take another shower, perhaps: a cold one.
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