Brazil’s hosting of the World Cup and the 2016 Olympic Games will create more inflation than growth for Latin America’s largest economy, according to a report by global trade credit insurer Euler Hermes.
Lack of infrastructure, severe underinvestment, protectionism, high levels of taxation and a complicated business environment will combine to prevent the country from fully benefitting from the additional economic activity these mega events will generate, it suggests.
“While research on mega events has shown positive short-terms effects on real activity, there is often a negligible or even negative long-term result – and Brazil’s economy poses particular problems,” said Ludovic Subran, Euler Hermes’ chief economist. “Not only has the country been unable to reap the full economic benefits of the World Cup, it now faces significant inflation that is impacting Brazilians’ everyday lives.”
Brazil’s 12-month inflation rate edged higher to 6.4% in May from 6.3% in April, and Euler Hermes expects a year-end inflation rate of 6.3% moderating only slightly in 2015 to 6.1%.
Preparations to serve as World Cup and Olympic host have not prevented a sharp slowdown of the country’s economy over the past three years, and this trend of slow growth is unlikely to change, the report said.
Having achieved a record rate of 7.5% in 2010, the Brazilian economy slowed sharply and grew just 2.7% in 2011 and 0.9% in 2012 before a modest recovery last year to 2.5%. However, the credit insurer predicts that Brazil’s gross domestic product (GDP) will grow by no more than 1.8% this year and 2.1% in 2015.
In 2014, Euler Hermes estimates that the positive impact from the two mega sports events on GDP growth will be limited to 0.2 percentage points (pp) at best. However, the impact on inflation could reach 0.5pp this year.
Overall, the two events are expected to add around 2.5pp to consumer price increases throughout the 2009-16 period, said the report. The impact on economic activity is expected to decline gradually after 2014, while the consumer price effects could remain up until 2020, the report added.
The report notes that the surge in inflation is already causing social unrest in Brazil, which could eventually result in deep structural reforms and a new political agenda.
“As social unrest continues to grow in response to the surge in inflation, it would not be surprising to see the sporting calendar shape the political calendar during October’s presidential elections,” said Subran. “Ultimately, deep structural reforms could be the real mega event for the Brazilian economy.”
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