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Brazil’s rebound remains uncertain

After a poor 2012, the central bank forecast growth of 4% for 2013; it has already cut this to 3.1%. International investors are going elsewhere in the region. With domestic investment falling, Brazil will do well even to hit that target.

The renaissance of Mexico and strong growth in the Andean countries have been casting an unfavourable comparative light on Latin America’slargest economy for nearly a year. But now weakness in the Brazilian economy is increasingly looking absolute and not just relative.

The linked challenges of political risk and a slowing economy have hit investor appetite at home and abroad. Investment – already at low levels – has stalled, slowing GDP growth to 1% in 2012. Consumption has become the government’s only policy to sustain growth, but that engine is spluttering, with consumers overleveraged and persistent inflation complicating demand-side initiatives. The central bank has belatedly begun to increase the Selic policy rate. It was raised 25 basis points to 7.5% in mid-April, a lukewarm response to inflation that now exceeds the target band of 4.5%, plus or minus two percentage points. Most economists had expected a 50bp rise to signal intent to the market, restore some of the bank’s credibility concerning its inflation-targeting mandate (although when did you last hear a central bank official even discussing the reduction of inflation to the mid-range target?) and have a stronger impact on the inflationary problems.