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Brazil economic growth disappoints again
May 30, 2013 / 12:37 AM / 5 years ago

Brazil economic growth disappoints again

SAO PAULO (Reuters) - Brazil’s economic growth fell short of forecasts once again in the first quarter as President Dilma Rousseff’s numerous stimulus packages failed to aid manufacturers while consumers, frightened by rising inflation, grew more conservative.

Employees work at the Sociedade Paulista de Tubos Flexiveis (SPTF) metallurgical company which manufactures flexible metal hoses, in Sao Paulo April 20, 2012. REUTERS/Nacho Doce

Even a record corn and soy harvest and a rebound in investment were not enough to avoid disappointing gross domestic product growth of just 0.6 percent compared with the fourth quarter, according to government data released on Wednesday.

Analysts expected 0.9 percent growth. Brazil’s stock market and currency both fell sharply as investors digested the growing likelihood of a third straight year of sub par growth.

Undeterred in its battle against high inflation, the central bank raised its benchmark interest rate to 8 percent from 7.5 percent, stepping up the pace of a tightening cycle after the disappointing first quarter growth.

The bank’s unanimous decision surprised market traders who were betting on a milder 25-basis-points hike after the weaker-than-expected economic data earlier in the day.

Rousseff, a pragmatic leftist who faces reelection next year, has passed numerous tax cuts and incentive packages to try and stir Latin America’s largest economy back into the fast growth that made it an investor favorite last decade.

The recent slowdown is partly global - other big emerging markets including Mexico, India and China have also struggled. But Brazil has been hit hard by homegrown problems such as high salary costs, falling productivity and terrible logistical bottlenecks that Rousseff has so far failed to solve.

“This was bound to happen,” said Humberto Barbato, president of ABINEE, a lobby group for the electronics industry, who called the GDP result “mediocre.”

“Industry is going to continue suffering as long as infrastructure doesn’t resolve its problems,” he said.

Finance Minister Guido Mantega said the 4.6 percent surge in investment compared with the fourth quarter heralded faster and better-quality growth ahead, since economists generally agree that Brazilians need to spend less and save more.

Nevertheless, economists warned they would be cutting their forecasts for full-year economic growth, which is becoming a kind of annual ritual in Brazil.

Industry shrank 0.3 percent compared with the previous quarter. One of the few reliable economic engines in recent years, household consumption, grew just 0.1 percent - the worst reading since the third quarter of 2011 - as a spike in inflation eroded the purchasing power of consumers.

That inflation, now running at 6.46 percent on an annual basis, has put Brazil in the uncomfortable position of needing to raise interest rates, despite the slow economic growth, highlighting the imbalances in the economy.

Many business leaders have called on Rousseff to undertake far more ambitious reforms of the tax and labor codes so factories can regain their competitiveness at home and abroad.


Brazil's currency weakened beyond the 2.10 per dollar threshold for the first time in more than five months. The Bovespa .BVSP stock index closed 2.5 percent down, its worst retreat this year.

The economy grew 1.9 percent in the first quarter compared with the year-earlier period, government statistics agency IBGE said. That was below expectations of 2.3 percent growth in the Reuters poll.

To be sure, Brazil’s economy remains strong in many respects, especially compared with the developed world.

Unemployment is at record lows, foreign investment levels are strong and Rousseff’s approval rating is at about 80 percent as many Brazilians continue to be happy with their government and the economy.

The economy was buoyed by a strong harvest as agricultural activity grew 9.7 percent compared with the fourth quarter, its strongest quarterly performance since 1998.

Investment as a percentage of GDP fell slightly to 18.4 percent, low compared with Latin American countries such as Chile and Colombia that have grown faster in recent years.

Prior to the data release, some analysts warned the investment numbers would be inflated by growth in just one category, heavy truck production.

Yet Mantega told reporters the investment growth was broad-based and a good sign for the overall economy.

“The quality of growth is better because we finally were able to wake up investment,” Mantega told reporters. “And that trend should continue.”

He said the government does not plan any additional stimulus measures.

David Rees, an emerging markets economist for Capital Economics in London, agreed a rebalancing of the economy toward investment would help Brazil “get back to the sort of growth rates of 5 percent which investors want to see and everyone thought was the new norm just a couple of years ago.”

Brazil’s 2012 economic growth was not revised from its previously reported 0.9 percent.

Additional reporting by Asher Levine and Alberto Alerigi Jr.; Editing by Todd Benson, W Simon, Andre Grenon and Andrew Hay

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