Brazil Firms May Be Slow to Benefit From Economic Upturn - Economist

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 [e-mail]

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