Ipea warns: economic model needs to change.

247 – The consumer stimulus model is exhausted. According to Ipea, the government should invest in public funds to give new impetus to the Brazilian economy. Read more in the Globo article:

A growth model that relies on stimulating consumption is exhausted. Instead, the government should focus on public investment—which, in turn, would give new impetus to the Brazilian economy. This is the argument of Roberto Messemberg, coordinator of the Analysis and Forecasting Group at Ipea, who yesterday released the institution's Conjuncture in Focus Bulletin. According to him, there is no longer strong enough demand to sustain the stimulus given to various sectors.

"If the government doesn't consider these measures as part of a larger plan, all it's doing is mopping up water, putting out fires, or sweeping the problem under the rug. In other words: doing nothing. Now, the country needs the government to be the protagonist of investments in sectors like infrastructure and energy," he said, adding that the crisis helped to curb Brazilian demand. "There was a weakening of segments, such as credit, that boosted domestic demand."

Consumption is losing momentum because families are facing high levels of debt and default. Data from Ipea indicates that the percentage of monthly family income committed to debt servicing (seasonally adjusted) has also shown an upward trend over the past year. In April of last year, debt servicing represented 19,8% of monthly income, rising to over 22,1% in April 2012.

— And the income redistribution programs, such as Bolsa Família and even the increase in the minimum wage, have already been implemented. With that, the greatest gains have already been achieved.

Lowering interest rates is essential, but insufficient.

The slowdown in retail sales is evident in the mood of shopkeepers. After three months of improvement, the Getulio Vargas Foundation's Retail Confidence Index worsened, showing a 3,7% drop from April to June compared to the same period of the previous year. Regarding the following months, the mood is also one of distrust, with the indicator falling by 4,3%. This discouragement is explained by sales. One example is the clothing sector, which, with weak sales and high inventory, has already begun liquidating seasonal items at the start of winter.

With an increase in the investment rate, the country would raise its productive capacity without generating inflation, the economist added.

This is what will guarantee sustained growth.

Messemberg points out that the Central Bank has been doing its part by lowering interest rates—a move that began in August 2011. However, he says, a lower Selic rate alone does not create conditions for new private investments.

"Lowering interest rates is essential, but it's not enough to make the investment rate rise," said Messemberg, who believes that by not encouraging investment, the government is prioritizing the primary surplus. "I can't agree with that."