By Frans van Hees | www.AboutBrasil.com | 01-03-2013

Sao Paulo - After years of growth,

the Brazilian economy

is slowing down. In 2012, Brazil's gross domestic product grew just 0.9 percent, the government said Friday. It was the worst annual result since 2009, when the GDP contracted 0.3 percent. The GDP grew 2.7 percent in 2011 and ballooned 7.5 percent in 2010.

Having a closer look on what is going on, it turns out that the industry , the secondary sector of the economy, is the Achilles' heel of the Brazilian economy. Industrial production fell last year by 2.7 percent. Measures of the Government appeared to be futile. It is a strange situation. The Brazilian economy is stagnating but simultaneously exhibits the symptoms of excessive growth, including labor shortages and growing inflation.

Automotive industry - Backbone of Brazil's economy

According to economists, this has partly to do with a decrease in the number of young people on the labor market and the excess of accumulated stocks.

De-industrialization

The slowdown in

manufacturing activity

is the biggest concern of the government of Dilma Rousseff.

The de-industrialization of Brazil

, a trend entrepreneurs and a handful of economists have been pointing out for years, is hard to ignore today. For this year, an improvement is expected. But it is unclear whether this will be powerful enough. The investments are low, the production of capital goods dereased last year by 11.8 percent, and inflation increases, which can lead to action by the Central Bank to reduce demand.

Disappointment

The results at the end of 2012 were "a cold shower", says Julio de Almeida, a consultant at the Institute for the Study of Industrial Development (IEDI). They indicate that "the crisis is deeper", more than a consequence of the severe global economic problems.

In the last 20 years, Brazil "has not followed the industrial evolution in the world." China, South Korea and India have just did. By not continuously developing the technological innovation of dynamic sectors such as electronics and pharmaceuticals, Brazil stays behind.

Moreover, for nearly fifteen years the Brazilian industry has been facing an accumulation of costs, in the field of logistics, finance and energy, which decreases the competitiveness, says Mr Almeida. Also, the wages of the last five years increased more than productivity. Last year alone, they went up on average by 5.8 percent, while the yield fell 0.8 percent.

Crisis of 2008

You can survive with less competitiveness if the world economy grows considerably. But the problems surfaced with the crisis in 2008 "diminished the industrial market" around the world and it put the domestic market under heavy pressure, says Mr Almeida. Despite all this, recovering is possible this year, he says. The government made electricity cheaper and taxes lower for some industries. Also interest rates went down, the exchange rate was stabilized and made announcements of severe investments in the transportation industry.

But also productivity has to be increased with heavy investments in technological innovation, especially since Brazil has "an outdated industry", Mr Almeida warns.

Automotive industry

The

automotive industry

dominates the wconomy of Brazil, and its share is ever increasing. In 2011 it accounted for 21 percent of industrial production and its importance has been doubled the last twenty years. Therefore, in 2008 the government primarily reduced vehicle taxation to ease the impact of the international crisis.

Oil and steel industries are other key sectors in order to counter the de-industrialization trend. Brazil wants to revitalize the shipbuilding industry, driven by the discovery of large oil reserves off the coast of Brazil.

Rapidly rising wages

According to economist Edmar Bacha, editor of a new book on the future of the Brazilian economy, the de-industrialization is not necessarily a disease: "The industry is not going well, but Brazil as a whole is doing great." There is a lot of employment and wages are high, he says. Moreover, according to Mr Bacha, competitiveness fell as a result of the rapidly rising wages. From 2006 to 2011, the average wages increased by 14.4 percent, a world record. Brazil leaves Australia, the second in the ranking with 9 percent, far behind, Beny Parnes and Gabriel Hartung, co-authors of the book, explain.

Mr Bacha does not approve the government interventions. Competitiveness can not be increased by moe protectionism, he says, but by greater commercial openness, allowing integration into international production. Mexico is a good example, according to Mr Bacha.