Brazil and other Latin American countries need to realize their economic boom could be over because of cooler global demand for their minerals and farm goods, International Monetary Fund officials said on Friday.
Brazil’s economy grew rapidly leading up to the global financial crisis, helping raise its stature on the global stage when the world’s policymakers turned to prop up their economies. But since then, aside from a year of sharp growth in 2010, Brazil has posted lackluster growth.
Speaking at the IMF’s semi-annual meetings in Washington, the Fund’s officials said there was no reason to think Brazil would return to rapid economic growth anytime soon.
That is because the boom in Brazil was fueled by rapid price gains in the commodities it exports—also benefiting countries such as Peru, Chile and Argentina—rather than policy changes to make its economy more productive.
“In the case of Brazil, nothing fundamental changed,” said Miguel Savastano, deputy director of the IMF’s western hemisphere department. “The restraints…that influenced the behavior of Brazil in the previous 10 years are still there.”
Brazil is one of the world’s top producers of commodities like iron ore and soy beans, whose values surged over the last decade due to China’s voracious appetite for raw materials. This has helped millions of Brazilians enter the middle class.
The IMF said this week in its World Economic Outlook report that commodity prices will likely soften over the next five years. That explains part of why the IMF doesn’t see Brazil’s economy growing faster than 4.2 percent in any year through 2018, the last year for which it provided a forecast.
Annual growth of 4.2 percent would be faster than the 3 percent rate that the IMF predicts in Brazil this year, but well below the blustery 7.5 percent chalked up in 2010.
“The region as a whole—and Brazil might be the country where we are seeing this phenomena first—will be showing some slowdown from…the golden years,” said Alejandro Werner, director of the IMF’s western hemisphere department.
This raises pressure on Brazil and other commodity producers to undertake more reforms to boost economic growth over the long term.
The region has made strides in recent decades at improving fiscal and monetary stability. But compared to the developed world, Latin America still suffers from very low rates of productivity, which means its workers produce less per hour than their counterparts in rich nations. Analysts say shoddy roads and ports make Latin America less productive, as does the prevalence of tiny, inefficient companies in the region.
The slowdown in Latin American growth means central bankers might need to be even more cautious than normal.
When economies settle into weaker paths of growth, inflation tends to heat up when exceeding the new normal growth rate. On average, the region grew 5.3 percent per year between 2003 and 2008. Over the coming five years, the IMF expects growth will average just under 4 percent.
Inflation is already surging in Brazil, which on Wednesday raised interest rates for the first time in two years.
“The policy mix in the countries in Latin America should be adapting towards economies that will be growing less,” Werner said.
(Reporting by Jason Lange; Editing by Chizu Nomiyama)