MercoPress. South Atlantic News Agency

Brazilian economy commodities dependency en route to its worst year since 2009

President Rousseff puffing and puffing but ignition is hard to come

The Brazilian economy expanded 0.4% in the second quarter of the year over the previous three months, and 0.5% over the same period a year ago, according to the latest release from the country’s official Brazilian Geography and Statistics Institute, IBGE.

The result which confirms the overall slowing down of Latinamerica’s largest economy also recorded a slight improvement over the first quarter, when growth was only 0.1%, ahead of the previous three months. Expansion in the first quarter was actually corrected downwards because originally it had been 0.2%.

IBGE thus reveals that the Brazilian economy expanded 0.6% in the first half of the year compared to 3.8% in the same period a year ago. Likewise growth in the last twelve months to June was 1.2%, down from March’s 1.9% and December’s 2.7%.

Data revealed on Friday coincides with the estimates from private sector economists who anticipated 1.73%. If these forecasts are finally confirmed in four months time, Brazil will have recorded its worst expansion since 2009 when the economy actually contracted 0.6%

IBGE data also confirms the deceleration of the Brazilian economy since after a torrid 7.5% expansion in 2010, it dropped to 2.7% last year. The slight recovery in the second quarter was pushed by agriculture and livestock which was up 4.9%. Services grew 0.7% but industry was down 2.5%.

Brazil’ manufacturing sector which is suffering the most from the international crisis, is the one most pressing on the overall slowdown. Industrial production was down 2.4% in the second quarter compared to a year before and so far in the first half of 2012, has contracted 1.2%. Minerals extraction was down 2.3% and the construction industry 0.7%.

Domestic demand that in recent years has become the engine of the Brazilian economy expanded 0.6% in the second quarter compared to the previous quarter, but below the overall 1.1% consumer expansion from the Brazilian government.

In order to help the economy regain its strength, Brazil’s government, under President Dilma Rousseff is cutting taxes on payroll, cars and appliances and also implementing policies to help weaken the country’s currency, the real. So far this year Brazil’s real has lost more value more than any other major currency but exports and growth have still not rebounded. Brazil’s economy currently trails Russia, India, China, and even Mexico in terms of growth.

In a recent article for Bloomberg, David Billier explained “resilient consumer demand hasn’t proved sufficient to sustain an industrial sector battered by the global slowdown. Industrial output fell 5.5% in June from the year before. With prices for Brazil’s iron-ore and other raw materials under pressure from slow growth in China, exports so far this year are down 1.7% from 2011 levels.”

For several years, many economists have been expressing concerns about the resiliency and long-term growth potential of Brazil’s economy. In a 2010 article for America’s Quarterly, Peter Kingstone, a Latin America expert from the University of Connecticut explained “Depending on how severe China’s slowdown is—and whether other nations step in to fill the void—Brazil’s overemphasis on commodities could prove dangerous not just to the country’s short-term fiscal health, but also to its long-term prospects for economic stability and development.”

These concerns have not eased. In a July 2012 article, Kingstone repeated the message, explaining “heavy reliance on commodities has created significant challenges that threaten the economy’s medium- and long-term prospects”.