Bloomberg News

Brazil Economy Contracts as Rousseff Tries to Revive Growth

December 06, 2011

(Updates with Mantega comments in third paragraph.)

Dec. 6 (Bloomberg) -- Brazil’s economy shrank in the third quarter, prompting the government to slash its growth forecast for the year, one week after announcing stimulus measures to contain the spillover from Europe’s debt crisis.

Gross domestic product contracted 0.04 percent from the previous three months, the national statistics agency said, as credit curbs, higher borrowing costs and budget cuts checked demand. The contraction, the first since the first quarter of 2009, is equivalent to an annualized decline of 0.17 percent.

As Europe’s crisis deepens, President Dilma Rousseff’s government is trying to reinvigorate the economy with a mix of tax cuts, interest rate reductions and looser bank lending requirements. Finance Minister Guido Mantega cut his growth forecast for this year to 3.2 percent from 3.8 percent, while maintaining his target of as much as 5 percent for 2012.

“The stimulus will prevent the economy from decelerating too drastically, but it won’t drive fast economic growth like Mantega wants,” said Enestor Dos Santos, senior Brazil economist for BBVA in Madrid, who forecasts 3.6 percent for 2012. As the global environment deteriorates, “five percent growth isn’t feasible.”

The annualized fall in GDP was led by a 3.4 percent contraction in industry and a 1.06 percent decline in services. Agriculture expanded at an annualized pace of 13.56 percent, while a 7.41 percent jump in exports prevented a deeper contraction.

‘Technical Recession’

The strength of exports is unlikely to be sustained with China’s economy slowing and Europe falling into recession, said Neil Shearing, an emerging markets economist at Capital Economics Ltd. in London.

“Brazil looks like it’s destined to enter a technical recession,” Shearing said in a phone interview. “This presents an opportunity to policy makers to get rates into single-digit territory and keep them there.”

The central bank has cut its benchmark interest rate three times since August, pushing it to 11 percent. The government also stepped in last week to defend growth, slashing 2.8 billion reais ($1.6 billion) in taxes, including levies on goods such as flour, wheat, bread and pasta, as well as on foreign purchases of stocks and bonds.

Prevent Contagion

Brazil will underperform its emerging market peers this year, according to International Monetary Fund estimates. GDP will grow 3.8 percent, while emerging markets and China will expand 6.4 percent and 9.5 percent respectively, the IMF said in its September World Economic Outlook. The U.S. will grow 1.6 percent.

The third-quarter contraction “has little to do with the international crisis and more with the delayed impact of monetary tightening and credit curbs,” Flavio Serrano, senior economist at Espirito Santo Investment Bank in Sao Paulo, said in a phone interview.

Policy makers raised interest rates five times this year through July, while the federal government slashed 50 billion reais from its 2011 budget. Brazil also raised taxes in April on consumer loans, a move they reversed this month.

Serrano expects the economy to expand 3.5 percent to 4 percent in 2012, with growth picking up in the third and fourth quarters as the delayed effects of falling interest rates and a 14 percent increase in the minimum wage boost consumer demand.

Weakening Real

Brazil’s real has sank 12 percent against the dollar since June 30 through yesterday’s close, as investors fled higher- yielding emerging-market assets on concern Greece would default on its debt and stall the world´s economy. The Bovespa stock index dropped 5.6 percent in the period, extending its decline for the year to 15 percent. Brazil’s real-denominated bonds have gained 7 percent this year in dollar terms, according to data compiled by Bloomberg. That compared with an average return of 0.7 percent in emerging-market bonds.

The yield on the interest-rate futures contract due January 2013 fell six basis points to 9.77 percent at 2:03 p.m. Brasilia time. The real declined 0.5 percent to 1.7950 per dollar.

The global slowdown has sapped demand for emerging-market assets, prompting companies to delay plans for investment. Sao Paulo-based beef producer Minerva SA won’t sell bonds until the global outlook improves, Chief Financial Officer Edison Ticle told reporters on Dec. 5. “The scenario is still very volatile,” Ticle said. “We’d rather wait to get a clearer picture.”

Hit the Hardest

Industrial output was the part of the economy hit the hardest by the deepening debt crisis in Europe, posting in September the second-biggest decline since the collapse of Lehman Brothers Holdings Inc. in 2008. Production sank 1.9 percent in September and 0.6 percent in October, according to the national statistics agency, as manufacturers were already reeling from a 46 percent rally in the real against the dollar from the end of 2008 through August, the most among major emerging markets.

Brazil’s “robust” jobs market will help the economy rebound, said Luciano Rostagno, chief strategist at Banco WestLb SA, in a telephone interview from Sao Paulo. Unemployment declined to 5.8 percent in October, a record low for that month.

“We’ve seen quite a good flow in stores this Christmas season,” said Luca Luciani, chief executive officer of Rio de Janeiro-based Tim Participacoes SA, Brazil’s second-biggest wireless operator.

Brazil is growing at a pace consistent with meeting its 4.5 percent inflation target next year, central bank President Alexandre Tombini said today in a statement on the bank’s website. The rate of price increases, as measured by the benchmark IPCA-15 index, slowed to 6.69 percent in the 12 months through mid-November, the slowest pace in five months, the national statistics agency said. Since April, inflation has remained above the 6.5 percent upper limit of the target range.

--With assistance from Lucia Kassai in Sao Paulo and Adriana Brasileiro in Rio de Janeiro. Editors: Harry Maurer, Bill Faries, Philip Sanders

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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