Brazil’s economy The only way is up

FOR many Brazilians, the high point of the Olympic games in Rio de Janeiro came in the rain-drenched Engenhão stadium on August 15th. That was when Thiago Braz (pictured) won an unexpected gold medal, and set an Olympic record, in pole vaulting. Brazil’s beaten-down economy is nowhere near performing a feat that would remind anyone of Mr Braz’s jump. But it may be starting to pick itself back up.

The signs are still tentative. Manufacturers are investing again: imports of capital goods were 18% higher in dollar terms in June than in the same month last year, the first year-on-year rise since September 2014. Industrial production increased in June for the fourth consecutive month after two years of nearly uninterrupted decline. Firms’ stocks of unsold goods are starting to shrink, and the number of lorries on motorways has stopped falling.

Firms are not yet ready to hire more people, says Arthur Carvalho of Morgan Stanley, a bank, but firings have slowed. That is making consumers less glum; one consumer-confidence index rose for the third straight month in July. After repeatedly reducing its growth forecasts, the IMF recently revised upward its projection for GDP next year. It now expects a modest expansion of 0.5% in 2017; in April the Fund was predicting no growth. Some private-sector economists expect the growth rate to be as high as 2% next year.

Much of the encouragement is coming from Brasília, the capital, which seems to be moving towards a resolution of the country’s prolonged political crisis. On August 25th the senate is due to begin the impeachment trial of Dilma Rousseff, Brazil’s unpopular president, on charges that she tampered with government accounts. Although she denies this, few observers doubt that she will be removed from office, probably in September. The vice-president, Michel Temer, who has been acting president since May, would then serve out the remaining 28 months of her term.

He has lifted spirits just by not being Ms Rousseff. The stockmarket has boomed since he took charge (see chart). More pro-business than the left-wing president and wilier in dealing with congress, Mr Temer promises confidence-boosting reforms. A bill to open up deep-sea oilfields to more private investment is making its way through congress. Another would oblige the environmental regulator to decide on licences for projects within ten months; this can now take years, investors grumble. On August 25th the government will present a list of state-owned firms it wants to privatise. The real’s sharp decline since 2011 makes Brazil’s exports more competitive, another spur to optimism.

None of this means that the economy is yet in good shape. Household incomes are still falling and the unemployment rate is expected to rise by another percentage point, to around 12%, before it starts to dip sometime next year. Lenders and borrowers are still behaving cautiously. A privatisation of the Goiás state energy utility, planned for August 19th, was cancelled because it failed to attract bids from nervous investors. GDP data to be released this month are likely to show that the economy continued to contract sharply in the second quarter of this year.

To keep confidence alive, Mr Temer must reduce the budget deficit, now an alarming 10% of GDP. Otherwise, high interest rates will continue to depress growth or inflation will surge. Mr Temer wants to amend the constitution to freeze government spending in real terms and to reform overgenerous pensions. So far, though, he has ramped up spending. He cajoled congress to relax Ms Rousseff’s target for this year’s primary deficit (before interest payments) from 1% of GDP to 2.5%. He accepted big public-sector pay rises and gave federal debt relief to Brazil’s bankrupt states.

Mr Temer’s aides say generosity now will buy political support for fiscal reforms once Ms Rousseff is removed from office. The markets believe this: the cost of insuring against default on government bonds has dropped (see chart). But the cheers will fade unless Mr Temer clears the high bar he has set for himself and the country.

The Economist |

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