SAO PAULO--Brazil's likely economic rebound in the second half
of this year won't necessarily boost corporate profits as Labor
costs remain high and still-tight competition keeps companies from
passing costs on to consumers, said Daniel Leichsenring, chief
economist at Brazil hedge fund Credit Suisse Hedging-Griffo.
Brazil's central bank started cutting interest rates last
year--bringing the benchmark Selic down to 8% this month from 12.5%
in August--and, together with the gradual narrowing of bank
spreads, that should boost growth going forward, Mr. Leichsenring
said Tuesday. Brazil's economy could expand close to 5% in the last
quarter of this year, bringing 2012 full-year growth to almost 2%,
he said.
Economists surveyed by the central bank expect Brazil growth to
reach just 1.9% this year, after expanding 2.7% last year and
surging 7.5% in 2010.
But even if Mr. Leichsenring's forecast pans out, he said
profitability won't be so quick to recover. Bolstered by government
social spending and a tight labor market, Brazil has seen labor
costs rise in recent years. Increasing household income has led to
more demand for services, which in turn has strained the labor
market and pushed up wages even further.
Meanwhile, productivity hasn't kept up and, in the case of
Brazil's manufacturing industry, has declined, Mr. Leichsenring
said. The government's increased spending on social programs and
wages wasn't matched by investment in infrastructure, hurting the
country's efficiency and competitiveness, he said.
So while industries such as mining and oil production have been
able to pass on those costs thanks to increasing global commodity
prices, the country's manufacturing base has been unable to raise
prices for fear of losing out to global competition.
"Even if the economy improves, profitability won't necessarily
improve," he said during a presentation to the Brazilian steel
distributors association in Sao Paulo. As a result, "investment
won't take off in Brazil because returns are going to be much lower
than they were previously."
Mr. Leichsenring also warned that Brazil's government has little
political motivation to reverse the situation. Whereas in the past
Brazil inflation meant an increase in prices of durable goods while
wages stagnated, recent bouts of inflation have seen the opposite:
wages increase, giving consumers more purchasing power, while stiff
competition from imports means a decrease in the prices of
manufactured goods.
"Today, for the first time, we see surges in inflation
increasing the popularity of the government," he said.
Write to Paulo Winterstein at paulo.winterstein@dowjones.com
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