The consumer picture in Brazil looks positive for both the short and long term. The country's economy has proven to be particularly resilient in the face of the global economic slowdown and is already experiencing a robust recovery following a minor recession. We expect the current level of GDP growth to be sustained over the entire forecast period (see chart 1), while private consumption is expected to grow even more rapidly with positive implications for our food, drink and retail forecasts.
The strong economic rebound from recession has impressed most observers and demonstrated the remarkable resilience of the Brazilian consumer. While retail sales moderated during 2009 (see chart 2), the indicator remained in positive territory throughout the downturn and the strength of the Brazilian consumer over the last year supports our view that it will be strong private consumption that will drive economic growth beyond the current downturn.
We expect the consumer sector to take an increasingly important role in driving economic growth, as the economy develops and becomes less dependent on the export of commodities. This is represented in our forecasts for private final consumption which is expected to outpace the country's overall economic growth rate (see chart 3). This very strong growth is supported by the rising affluence of middle class consumers and the increasingly positive picture for Brazil's large low-income population. Government policies to help this section of society, with measures such as increases to national minimum wage, have led to a rapid reduction in extreme poverty and in turn created a larger consumer base for the food, drink a retail sectors.
The burgeoning consumer sector is expected encourage foreign investment flows into Brazil and attract business interest from a wide range of food and drink sectors with firms such as The Coca-Cola Company, Wal-Mart, Carrefour and Nestlé all making the market a priority. The 2014 FIFA World Cup, followed by the Olympic Games in Rio de Janeiro in 2016 is also set to promote investment into sectors that traditionally benefit from major sporting events, including beer, soft drinks and retail, with these events representing an opportunity for Brazil to shine as both an investment and tourist destination.
Risks To Outlook
The strength of consumer demand clearly poses a risk of inflation and we are pencilling in several rate hikes over the coming year as the government looks to avoid allowing the economy to overheat. Consumer credit has become an increasingly important part of the consumer growth story over the last couple of years in part due to government initiatives to aid the ownership of white goods by low-income families - a policy which has seen the government put in measures to encourage banks to offer credit.
However, rate hikes are expected to have a limited impact on sales of food and drink. The resilience of the Brazilian consumer during the last 18 months came in spite of a slowdown in private-sector credit growth - as banks moderated lending policy in response to the worsening global credit conditions- suggesting that consumer spending can be sustained without increased levels of consumer borrowing. This would also suggest an increase in interest rates should not put too much downwards pressure on the consumer growth picture as long as inflationary pressures do not escalate and upwards movement of interest rates does not significantly exceed expectations.
The other main risk to our outlook is the prospect of a secondary slowdown in China. In 2009 China became Brazil's main trade partner and strong Chinese demand for strategic raw materials, such as crude oil, iron and soy, helped to prop up Brazilian exports. However, overly accommodative fiscal and monetary stimuli in China have led to an overheating that could result in a sharp withdrawal in 2011. Even if China manages to avoid this scenario, we are projecting a slowdown in Chinese import levels towards the latter stages of 2010 as Beijing recognises the need to rebalance the economy towards domestic consumption; such a move would put downwards pressure on Brazilian growth and could necessitate a diversification away from China as an export destination.