Fichas Caindo

The chips are falling here in Brazil, to bowdlerize the Portuguese expression. In my last post, I spoke of the use and abuse of GDP rates by investment professionals. Now, the Brazilian government has released its 4th Quarter 2008 figures and the GDP has fallen by 3.6% in the quarter. This despite the government's claims that current GDP would continue to rise at an annual rate of some 4.5%. Yesterday's news is quite discouraging and is claimed by the government to be unexpected.

It shouldn't be. All the indicators were in place to show that the GDP would likely drop--reduced industrial output, increased unemployment, reduced consumer spending and confidence, reduced exports and imports (both). In fact, number reported in this morning's newspapers showed that only one sector of the GDP continued to grow. That, of course, was government spending. The Lula government has continued its expansion during the current quarter, increasing federal employment and granting significant wage increases to unions threatening to strike and disrupt government services. Yesterday, Lula's response to the release of the GDP data continued to be defiant. He continues to claim that there will be no recession in Brazil. This contradicts the general opinion of economists and market professionals. Commentators from Joseph Steigletz to Nouriel Roubini's Latin American EconoMonitor strongly suggest that a recession is now inevitable in Brazil.

The President's insistence just ten days ago that he could give a lesson to the other G20 leaders in April on how to run an economy seems a pretty vain boast right about now although he does not perceive it.

Brazil's reduction in its IPI tax to support the auto industry has proved success and the government deserves full credit to assisting the industry to avoid layoffs and salary cuts. Factories which had planned these reductions suddenly had to recall their workers as reduced taxes led to reduced prices which led to increased demand which led to patios empty of unsold cars. The government must find new ways now to boost demand now that pent-up demand for automobiles has largely decreased.

More on this tomorrow.