Bloomberg News

Brazil’s Economy Slowing Less Than Expected on Strong Demand

March 26, 2012

Brazil’s economy slowed less than analysts expected in January as demand for goods and services helped offset a contraction in industrial production.

Brazil’s seasonally-adjusted economic activity index, a proxy for gross domestic product, fell 0.13 percent in January, the central bank said today. Analysts expected a 0.5 percent decline, according to the median estimate in a Bloomberg survey.

Near record low unemployment and rising wages are preventing Latin America’s biggest economy from a sharper slowdown even as manufacturers pare output amid a currency rally that is fueling imports. Robust domestic demand may reignite inflation forcing the central bank to reverse course and resume interest rate increases early next year, said Marcelo Salomon, co-head of Latin America economics at Barclays PLC.

“Economic growth may surprise on the upside in the first quarter,” Salomon said in a phone interview from New York. “This means inflation pressures may resurface earlier than expected.”

The yield on interest rate future contracts maturing in July 2012, the most traded in Sao Paulo, rose 2 basis points, or 0.02 percentage point, to 9.04 percent at 10:10 a.m. local time.

Even as retail sales rose 2.6 percent from December, the biggest increase since February 2010, industrial output fell 2.1 percent, the biggest drop since December 2008.

Economic Paradox

“The Brazilian economy is experiencing a paradox -- weak growth and full employment,” Roberto Padovani, chief economist at Votorantim CTVM Ltda., said in a phone interview from Sao Paulo. “What we are seeing is a problem in industry, not a weak economy.”

A separate report today showed that economists expect slower growth this year, and faster inflation.

The world’s sixth-largest economy will expand 3.23 percent this year, down from a 3.3 percent forecast in the previous six weeks, according to the median forecast in a March 23 central bank survey of about 100 economists. The last time analysts cut their forecast was Jan. 13.

Consumer prices in Brazil will rise 5.41 percent over the next 12 months, up from 5.37 percent in the previous week’s survey. Prices will rise 5.28 percent in 2012 and 5.5 percent next year, more than the central bank’s 4.5 percent target, the survey showed.

Annual inflation slowed to 5.61 percent through mid-March, from 5.98 percent in mid-February, the national statistic agency said last week.

Policy makers cut the Selic (BZSTSETA) rate by 75 basis points to 9.75 percent on March 7 in an effort to revive growth that slowed to 2.7 percent last year from 7.5 percent in 2010. Central bank President Alexandre Tombini said last week that slower global growth will help policy makers achieve their goal of bringing inflation back to target by year’s end.

Economists expect the central bank to cut its benchmark rate to 9 percent this year and to raise it again next year to 10 percent, the survey showed. The forecast was unchanged from last week.

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net Raymond Colitt in Brasilia at rcolitt@bloomberg.net

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


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