Brazil's Economic Growth Must Slow to be Sustainable

With an average economic growth rate of 5% since 2003, Brazil's economic strength has increased its appeal as a nearshore destination, contributing to job growth, advanced technological expertise, and safer investments for buyers.  However, Tony Volpon, a managing director at the Nomara Group, predicts that for Brazil's economy to stabilize, annual growth must slow to 4% or less.

Is there a credit bubble in Brazil? Volpon says no, but rings some alarm bells anyway. “Excessive optimism on the part of creditors and inexperienced banks combined with inadequate prudential policies lead to excessive leverage,” he wrote. “The explosive growth of loans for cars, which already exceeds 4% of GDP, and the acceleration of housing prices are warning signs that we are on the way to creating an unsustainable structure of liabilities within the economy,” he wrote.

The decline in productivity shows that the irrational exuberance of the current job market is about to end, he wrote. “Entrepreneurs may individually believe for a time that the laws of supply and demand do not apply to them, and of course there will always be sectoral distinctions that have to be taken into account. But for the economy as a whole, lower economic growth lowers corporate revenue. If they continue to hire and award wages increases they will see their net profits decrease. A falling rate of profit must then bust the bubble in the labor market.  The slowing credit growth should limit the strong growth of recent years,” he wrote.

Read it at Forbes.