Back on track?

German Brazilian Business Outlook 2018

By Dr. Claudia Bärmann Bernard

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Brazil is the world’s ninth largest economy and, with 207 million inhabitants, traditionally an important destination for German investment. Over 1400 German companies have established their presence in the country and account for about 10% of Brazilian GDP. Furthermore, the Greater São Paulo area is the largest German industry location outside of Germany.
The German Brazilian Chamber of Commerce and Industry São Paulo conducted the 1st German Brazilian Business Outlook survey at the end of last year. We asked our members for their assessment of the political and economic situation as well as their business expectations in Brazil for 2018. Small and medium-sized companies as well as large multinational companies from different sectors, such as automotive, consumer goods, IT, logistics, mechanical engineering, chemistry, services, electronics and infrastructure, participated in the survey.

Economic and political situation in Brazil

Brazil is gradually emerging from its worst recession in over 100 years. After plunging 8.7% between 2014 and 2016, Brazil’s GDP increased by 1% in 2017 and is expected to grow 2.75% again this year. Thanks to record harvests in the agricultural sector, one of the most important for the Brazilian economy, and the resumption of household consumption, there was a slow recovery of the economy in 2017, which then accelerated in early 2018. A historically low inflation rate of 2.9% in 2017, falling interest rates and the onset of recovery in the labor market are important factors for elevated consumption. Corporate investment has been picking up since mid-2017, which seems extraordinary since newly revealed corruption cases caused political and economic turmoil throughout 2017.
As a result of low inflation, Brazil’s Central Bank has set the Brazilian interest rate, Selic, at a historic low of 6.5% – down from 13.75% in 2017. Private consumption and consumption intentions continue to rise and manufacturers of durable consumer goods, such as home appliances and automobiles, are reporting increasing sales.

However, the economic upturn could be halted abruptly by further political developments. Presidential elections will be held in October that will set the course for Brazil for the coming years. The new president must continue the path of reform that was originally taken by the current incumbent, Michel Temer, but stopped in mid-2017. Following his presidential takeover in August 2016 after the impeachment of then president Rousseff, Temer launched much-needed austerity measures, establishing a cap on public spending. He also concluded important reforms, including a more business-friendly labor market. In June 2017, reform policies ended abruptly when allegations of corruption were made against him. Since then, there has been political standstill and the urgently needed pension reform will not be passed during the current legislative period.

Despite all its challenges, Brazil continues to be more than the eternal land of future opportunities. Regardless of its current weakness, its domestic industry is the most diversified in Latin America. In combination with the country’s vast resources and energy wealth, it has the potential to be a driver of economic development, which, in the medium term, will also strengthen Brazilian SMEs. The economic crisis has led to a reorientation in many sectors, and in some cases even essential restructuring. In order to recover its competitiveness internationally, Brazil’s industry needs technology, innovation and quality. This in turn offers great business opportunities, especially for German machine and plant manufacturers. The German concept of Industry 4.0 could also be very successful in terms of digitalization in Brazil.

Goods “Made in Germany” continue to be in demand in the health, environmental, energy and transport sectors. Oil and gas, as well as mining, are two other industry areas with business opportunities for German companies in the medium to long term.
Brazil needs to expand its infrastructure, which likewise offers business opportunities for German companies in the infrastructure supply industry. The new PPI (public-private investment) partnership program is set to overcome financial and structural obstacles in implementing infrastructure projects. The program comprises a total of 34 concession and privatization projects in the transport, energy, public utilities and mining sectors, intended to stimulate the investment activity of companies. In addition, the privatization of several energy and utilities companies is projected to improve competitiveness and flush money into empty state coffers.

Key points of the German Brazilian Business Outlook survey

One third of our members expects the political situation in Brazil to improve in 2018, while half expect the situation to remain unchanged.

German companies are more optimistic regarding economic development: 71% rate the economic prospects in Brazil as satisfactory for 2018.

Although only one third considers the current situation in their own industry sector to be satisfactory, the outlook for industry sector development in 2018 is optimistic. Almost all companies expect the situation to be better or remain consistent compared to last year. The optimism for the coming year is also reflected in the answers regarding the expected specific growth rates for the industry sectors: 43% anticipate growth of over 3%.

More than half of the German companies surveyed expect sales to increase in 2018. 35% of companies expect sales growth of 3% to 5%, while 15% forecast an increase in sales of over 5%.

The export situation will remain unchanged for more than 75% of the German companies surveyed.

The worst of the crisis appears to be over. Only 10% of the companies plan for job cuts in 2018 and 85% of our members intends to maintain their investments at current levels, while 15% plan to increase them.

Overall, one third of headquarters in Germany predict that the participation of their Brazilian subsidiaries in global revenue will increase within the next 5 years.

Suggestions for a more competitive economic environment in Brazil

German companies would welcome a rapid and successful completion of the negotiations for a free trade agreement between the EU and Mercosur. 89% of the companies surveyed predict that their own business situation would improve with the provisions of the agreement.

The absence of a double taxation agreement between Germany and Brazil is felt by German companies and considered a significant barrier to business. The resumption of negotiations is important to improve economic bilateral relations.

German companies were also asked about local business conditions, which are an important factor for investment decisions.

Almost all companies consider the complexity of the Brazilian tax system to be one of the biggest challenges and a factor for making business more expensive and more complicated. A reform of the tax system, simplifying taxation and secondary requirements, is considered important for an advancement of investment in Brazil.

Furthermore, German companies still consider labor costs to be high. Mea- sures to combat crime and corruption are considered insufficient by nearly all companies.

In addition, the majority of companies view the Brazilian infrastructure as dissatisfactory.

In summary, a large number of our members still considers the situation of their industry sector to be difficult. However, there is a positive outlook with regard to their own business situation, which they expect to improve in the coming year.

The German Brazilian Chamber of Commerce and Industry São Paulo

The chambers in São Paulo, Rio de Janeiro and Porto Alegre are part of the German Chambers of Commerce Worldwide Network AHK with 130 chambers in 90 countries.

Our chamber in São Paulo has been advising and servicing German companies for over 100 years. We have offices in Curitiba and Blumenau in the southern region of Brazil.

juridico@ahkbrasil.com