Brazil’s consumer-spending boom a bubble

Brazil’s consumers seem close to maxing out on their credit-fueled spending on everything from new cars to beauty treatments that has been a crucial growth engine for Latin America’s largest economy. The main question now is: How hard will they fall? Most see a gentle easing of demand as consumers have their wings clipped by the central bank’s five interest rate hikes so far this year including Wednesday’s rise that brought the benchmark rate to 12.5 per cent and government steps to curb credit that has been growing at an annual pace of around 20 per cent. But there is a risk of a bumpier and steeper ride down and a small, but growing, group of economists are pruning expectations for growth on concern that bubble-like conditions in the credit and job market could pop. “The current pattern of growth in Brazil is looking particularly unsustainable,” said David Rees, Latin America economist at London-based Capital Economics. His firm has penciled in a meager 2.5 per cent expansion for Brazil in 2013, believing that consumers have binged too much on credit. That is a shockingly low figure for a country that has become used to being ranked alongside China and India as the world’s hottest big emerging markets. Brazilians have splashed out cash and credit cards as they rushed up the social ladder into a middle and upper income class that has swollen by 48 million people since 2003 more than the population of Spain. Their unbowed desire for more cars, TVs and beauty treatments kept the economy out of recession in 2009 after the global financial crisis and propelled gravity-defying growth of 7.5 per cent last year. Brazil’s economy is heavily geared toward consumption — household spending accounts for about 60 per cent of gross domestic product compared with around 36 per cent in China.  Now, though, the headwinds appear tough to resist as stubborn inflation, painfully high interest rates and a heavy personal debt burden threaten consumers’ spending power. To be sure, a robust job market is pushing up wages and supporting consumers’ still brisk spending. Unemployment is near historic lows at 6.2 per cent and salary gains have been handsomely outstripping inflation. But jobs are traditionally a lagging indicator of activity and will be the last to feel the cooling of growth to around 4 per cent this year, economists say. “If you take away a strong labor market and you take away credit you basically get a different Brazil, a much lower growth Brazil,” said Tony Volpon, Latin America strategist at Nomura in New York.  For him, Brazil is on course to return to more “boring” rates of growth  just 3.8 per cent this year and 3.7 per cent in 2012  barring deeper reforms to improve Brazil’s business environment. Volpon believes the job market may have entered bubble territory as companies chase scarce workers with higher salaries despite a gathering slowdown. “Labour productivity is basically crashing in Brazil. Unless companies stop paying these crazy salaries ... they are going to destroy their profitability,” he said. Weaker consumption would leave Brazil with few bright spots other than strong foreign demand for its mining and farm commodities. From / Gulf today