The Brazilian construction sector was forecast to continue growing strongly. That growth was fueled by increases in infrastructure and big contracts like the Olympics and World Cup. But the economic situation has failed to meet expectations. In fact, Brazil’s economy has seen nearly flat growth, rising inflation and an increasing trade deficit. What does this mean for construction? And what about heavy equipment?
Global and regional forecasts
The 2013 IHS Brazil PAC2 and 2014 IHS Global Insights reports both gave sober yet optimistic forecasts for the Brazilian construction sector in the near term. Indeed, the PAC program, Brazil’s 2007-2010 program which emphasized growth in infrastructure and sanitation ahead of the Olympics and World Cup, has seen government spending increased from $258.7 billion 2007-2010 to $526 billion 2011-2014.
Forecasts from major reports like those from IHS and Timetric.com project continued growth in the construction sector in anticipation of the 2016 Olympic games. This is because the games require new developments in transportation networks, facilities, hotels, sanitation, and general city infrastructure.
Additionally of note, the IHS Global Insights 2014 ranks Brazil as the 9th largest global construction market, but also the 19th riskiest. Any bump in spending in preparation for the World Cup and Olympics is expected to taper off post-games.
Brazil’s current economic situation
The Economist reported that Brazil’s economic situation is facing problems after the recent election there. With a 1.8 billion dollar trade deficit as of October 2014, both imports and exports have been affected in recent times. Brazil’s growth rate is expect to be nearly flat for 2014, with Brazil itself forecasting 0.5% and economists forecasting only 0.2% growth.
BBC Business reports that Brazil is in fact in recession, noting that the World Cup was a distraction from larger economic troubles. All important economic indicators show negative trends: GDP is down, extreme poverty has risen, inflation is up, and retail and industrial output are down.
What does this mean for the construction sector?
Two important measurements of Brazil’s construction sector, ICST (Construction Confidence Index) and INCC (National Construction Cost Index), are both down according to The Rio Times. Construction activity is “slowing sharply” [first half of 2014] and no change is expected “in the second half.” Cost of construction equipment did rise in June and July 2014, thought it came along with rises in materials costs and a decrease in labor cost. Expectations in construction companies are “increasingly negative,” with an index score of -10.8, up from -9.8 in July.
Analyzing the impact on construction equipment
Brazil is certainly facing complex economic times. Key reports like IHS or the ICST show incongruencies between forecasts and results.
Taking everything into consideration, the construction sector in Brazil is still one of the world’s largest. As a developing nation, infrastructure improvement, transportation expansion and housing will be in high demand for some time to come. Wherever large projects in infrastructure and housing exist, so too will strong construction activity. With that said, Brazil is a risky market: there may be large gains for those willing to risk it; there may also be huge loses.
We should be reluctant to view Olympics and World Cup boots in the construction sector as indicators of future performance.