November 12, 2019 / 6:33 PM / a month ago

Brazil private sector does more heavy lifting, but economy still struggling

BRASILIA, Nov 12 (Reuters) - Brazil’s private sector is replacing government spending as the engine of growth in Latin America’s largest economy, an accelerating trend championed by the government and central bank, but one that will take time to boost jobs and income, economists said.

Data compiled by the Economy Ministry’s economic policy secretariat (SPE) shows that private sector gross domestic product rose at an annual rate of 2.22% in the second quarter of this year, while government GDP fell by 1.56%.

Brazil’s private sector currently accounts for just shy of 80% of the economy.

The shift to private sector growth has accelerated recently following a plunge in government GDP. Fausto Vieira, general coordinator of economic projections at the SPE, says growth in private sector investment and consumption is a natural consequence of falling interest rates.

The central bank last month cut benchmark borrowing costs to a record low 5.00% and indicated it will reduce them by another 50 basis points next month. At the same time, the government is doing all it can to rein in public spending.

Economy Minister Paulo Guedes on Friday estimated private sector GDP will rise by 3% next year, while public sector growth will be virtually zero.

Many economists say this is feasible but warn tangible benefits from the transition to a private sector-led economy will not be felt right away.

“Society will feel this more next year,” said Solange Srour, chief economist at ARX Investimentos. “First you see an increase in consumption and investment ... but employment and income will come later because there is so much slack in the labor market.”

Talk of public-to-private transition is increasingly part of central bank rhetoric, making it into the rate-setting committee’s official minutes from its last policy meeting.

Central bank president Roberto Campos Neto has noted that lower long-term bond yields and interest rates are as important as cutting the official Selic rate, as it will encourage the private sector to finance long-term projects.

Not everyone is convinced. Banco Fator chief economist Jose Francisco Goncalves says positive effects of cheap money will only really be felt when employment data improves, something he does not expect until the second half of next year at the earliest.

It is something of a vicious circle, according to Goncalves. Employment will only increase with investment but with government investment at historic lows that has to come from private sources. That is not happening, he said. (Reporting by Marcela Ayres Writing by Jamie McGeever; editing by Stephen Eisenhammer and Steve Orlofsky)

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