By Nathan E Williams, Contributing Reporter RIO DE JANEIRO, BRAZIL – The developed world remains in the grip of economic uncertainty and slow growth as consumers reduce spending, particularly the credit-driven spending which contributed first to the economic boom and ultimately, the bust. In Brazil, the picture could not be more different. In the midst of rising inflation consumers are showing no signs of moderating their spending habits, preferring to incur more credit-card debt to keep on spending. Credit spending is fueling the Brazil economy, photo by Worradmu/freedigitalphotos.net. While U.S. consumers were working to reduce their credit card balances last year by an average of 8.7 percent, Brazilian consumers were increasing their credit-card debt by an extra 28.9 percent, according to figures compiled by the Lafferty Group. This rise was a long way ahead of the general trend across the region which saw Latin American credit card debt rise by 9.2 percent. Tellingly perhaps, bullish Brazilian consumers even raced ahead of China where consumers added 17.1 percent to their debt. Foreign investors have been keen to cash in on this growth, pushing the Brazilian currency to a twenty-five year high against the U.S. dollar, bolstering inflation and prompting finance minister Guido Mantega to warn late last year of a ‘currency war.’ While the rhetoric has since receded, the problem for Brazil remains very real. Since 2005, 91 million Brazilians have joined the middle class and this number is expected to swell by a further 36.1 million by 2014, according to the São Paulo consumer federation, Fecomercio. The expansion of Brazil’s middle class, while lifting people out of hardship, also poses real questions about the nature of Brazil’s economic success story. Brazil Minister of Finance, Guido Mantega, photo by Renato Araújo/ABr. Middle-class growth has brought a seemingly insatiable appetite for consumer goods and this has resulted in a significant expansion of credit to meet growing consumer demand. In recognition of the need to reign in consumer spending the government announced last month that it would double the tax on consumer credit for individuals to 3 percent from 1.5 percent. This decision followed action in December from the Brazilian central bank, Banco Central do Brasil, which raised the amount of cash Brazilian banks are required to hold in reserve in case of a crisis as part of its effort to put a brake on inflation by reducing the availability of credit. Inflation has been creeping up for a number of months and in April hit 6.51 percent, above the government’s upper limit. The danger of course is that these measures work too well and rather than reduce inflation and spending to more sustainable levels instead end up hurting the economy. Addressing these concerns last week, Mantega said: “We’re managing to calibrate a reduction in demand, a reduction in credit, and a reduction in spending. However, it’s not going to bring down the economy. Investments will continue.” An early warning sign, should Brazil fail in its efforts to halt spending, came late last year when the government-owned Caixa Economica Federal bailed out Banco PanAmericano, which was on the verge of collapse as a result of consumers defaulting on car loans and other consumer debt. The Brazilian government has a delicate economic and political balance to strike. Many Brazilians will not take kindly to seeing their spending power diminish especially as the ability to buy more expensive consumer goods is a relatively new luxury for many people. However, unless the government takes these steps to halt the credit boom, the bail-out of Banco PanAmericano will be seen as a warning sign that was not sufficiently heeded. 11 Responses to "Credit Spending Fuels Brazil Growth" Pingback: National Campeonato Brasileiro Countdown | The Rio Times Pingback: Days of Sun and Rain | The Rio Times Pingback: Over Half of Brazilian Families in Debt | The Rio Times Pingback: Executives in Brazil are the Highest Paid | The Rio Times Pingback: Where’s the Money? | The Rio Times Pingback: Making Smart Use of the Brain Gain | The Rio Times Pingback: Brazilian Economy Growth Slows | The Rio Times I Brazil News Pingback: São Paulo Property Up Almost 20 Percent | The Rio Times I Brazil News Pingback: Brazil's Immigration Surges 52 Percent: Daily Update | The Rio Times | Brazil News Pingback: Amazon.com to Launch in Brazil: Daily Update | The Rio Times | Brazil News Pingback: Petrobras to Limit Investments | The Rio Times | Brazil News Leave a Reply Cancel Reply Your email address will not be published.