Brazil is not an economic superpower yet

BraziL’s rate of investment is failing to keep pace with demand sparked by President Luiz Inacio Lula da Silva’s stimulus programmes, threatening to quicken inflation and force policy makers to increase interest rates.

As demand recovers after Brazil’s first recession since 2003—helped by public spending, tax cuts and lower borrowing costs—investment in new capacity rebounded too slowly to guarantee near-term supply, according to Morgan Stanley and Credit Agricole SA. Quickening inflation and rising interest rates may slow gains in the benchmark Bovespa index from 82% this year to less than 30% in 2010, Morgan Stanley said.

“We have a lot of catching up to do,” Vladimir Caramaschi, Brazil strategist at Credit Agricole, France’s biggest bank by branches, said in an interview from Sao Paulo. “Investment is just not going to be enough to meet demand.” Brazil, historically a laggard in investment in factories, machinery and other fixed capital, hasn’t changed course even as it recovers faster than most from the global recession. “The so-called Brazil cost of taxes, bureaucracy, labour laws and interest rates that remain the highest among G-20 economies discourages investment,” Caramaschi said.

The Brazilian economy is “doing well”, Nobel Prize-winning economist Paul Krugman, 56, told journalists in SaoPaulo December 2. “It’s not the same as to say it will become the economic superpower next year. The markets are reacting as if it will.”

Brazil’s real is up 34% against the dollar this year, the biggest advance among the world’s 16 major currencies, and the Bovespa index has

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