Brazil has enjoyed an exceptionally favorable economic environment in recent years, but the times they are a-changin', according to Marcelo Carvalho, writing in Morgan Stanley's latest Global Economic Forum. Though Brazil's outlook for 2008 remains firm, the global slowdown will likely impact on the economy in 2009, bringing an end to Brazil's run of better-than-expected growth figures. As Carvalho notes:

The global growth outlook is darkening. Indeed, in January, the IMF already cut its estimate for 2008 global growth by 0.3pp. And it looks bound to cut it yet again at the upcoming release of its semi-annual World Economic Outlook on April 9. Our global economics team sees global growth slowing by a full percentage point this year, from an estimate of almost 5% in 2007 to about 4% in 2008, with risks still biased to the downside. Indeed, with concerns that the US slowdown might prove to be deeper and longer than initially foreseen, it would not surprise us to see 2008 global growth figures eventually sliding towards the 3% mark. Our global team sees some recovery in 2009. But the recovery path remains short of the growth pace seen in 2007, and risks are that it could prove tepid.

Brazil has so far proven to be decoupled from external troubles. While growth in the developed world has already slowed, Brazil's expansion has recently accelerated. The key, according to Morgan Stanley, lies in export prices: Brazil’s export prices have historically reflected trends in China’s imports, with a time lag of about six months.

That link should not surprise. About half of Brazil’s exports are commodity-related, and China plays a key role in commodity markets. Note that Chinese trade seems the relevant variable here, rather than China’s domestic growth per se. The experience around the 2001 US recession is telling. Forget about China’s official growth numbers: they barely budged back then. Yet, China’s exports (and imports) fell from growth rates in the 30-40% range to single-digit terrain, dragging along Brazil’s export price growth into negative territory, after a six-month lag.

Consequently the downside risk to China's trade is likely to impact on Brazil, with a time lag. This will bring the value of the Brazilian real into question, and secondly will impair Brazil's growth outlook. In terms of growth, Brazil has been in paradise since 2003 - its average annual growth increased from 2.3% in the four years before 2003 to 4.5% in the four years after 2003 - but that Utopian era may now becoming to an end, with 2008 proving to be the transition year. And Carvalho notes that while its growth has been historically high in recent years, Brazil has underperformed other emerging market economies. Morgan Stanley predicts that the country's trade surplus will fall in half, vanishing by 2009 - this is an out-of-consensus call - while its current account will dip into deficit in 2008. The real is forecast to fall to 2.0 by end-2008 and 2.1 at end-2009.

In conclusion:

Given lags, the full implications of global growth slowdown on Brazil’s growth performance will likely become more visible only by next year. We are thus cutting the Brazil 2009 growth forecast to 3.0%, from 4.0% before. If it materializes, such a number would be far from a disaster, but would probably frustrate those that got used to seeing Brazil as a 5%+ growth story... With a time lag, Brazil may well realize that the faster growth it enjoyed in recent years had more to do with favorable cyclical external conditions than with structural domestic advances.

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Gary Smith

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