Brazil’s growth slows despite resilient consumers

Brazil’s growth slows despite resilient consumers

BRIAN ELLSWORTH AND BRAD HAYNES

RIO DE JANEIRO/SAO PAULO— Reuters

Published Friday, Sep. 02, 2011 3:36PM EDT

Last updated Friday, Sep. 02, 2011 4:03PM EDT

Brazil’s economy slowed in the second quarter on weakening in the agricultural and industrial sectors, possibly signaling a sharper slowdown in coming months as its boom fades.

But Latin America’s largest economy kept growing strongly in some sectors, raising doubts among economists that the central bank’s surprise move to slash interest rates this week may have been premature as inflation hovers above 7 per cent.

Signs have grown that the economy has entered a sharper slowdown in recent weeks as a weaker global economy exacerbates a deceleration in Brazil after its breakneck – and unsustainable – expansion of 7.5 per cent last year.

The central bank shocked investors this week by slashing interest rates by 50 basis points to 12 per cent, citing a “substantial deterioration” in the international outlook as the United States and Europe struggle with debt and anemic growth.

Gross domestic product in Latin America’s largest economy grew 0.8 per cent from the previous quarter after a 1.2 per cent expansion in the first three months of the year, the statistics agency IBGE said Friday. That was in line with the median forecast of 17 analysts in a Reuters poll.

“The number still shows an economy growing above its capacity. It’s a reasonable [growth] rate,” said Zeina Latif, Latin America economist with RBS Securities. But, she added, “there will be a stronger slowdown.”

GDP grew 3.1 per cent compared with a year earlier, down from 4.2 per cent in the previous quarter. Consumers, backed by record employment, continued to spend briskly.

Consumer spending, which makes up about 60 per cent of the economy, rose 1.0 per cent from the previous quarter, speeding up from 0.7 per cent in the first three months.

Slower growth may let policymakers advance two key goals – bringing down nagging inflation and further easing lofty interest rates.

But it also signals that Brazil, which has been a rare bright spot in the struggling global economy, risks falling behind fellow fast-growing emerging markets such as China and India. It could face further weakening of corporate profits and a continued slump in the Bovespa stock index that is already one of the world’s weakest markets this year.

Finance Minister Guido Mantega said Brazil was likely to maintain strong economic growth despite a weaker international outlook, forecasting solid growth in both 2011 and 2012.

“Brazil can sustain growth, as of next year, at around 5 per cent,” he said, putting this year’s growth at 4 per cent. Many analysts have been downgrading their forecasts and are projecting growth this year will be closer to 3 per cent.

The Bovespa index was down 2 per cent in afternoon trading, tracking a 1.8 per cent slump in the Dow Jones Industrial Average. Brazil’s currency, the real, slipped against the dollar in line with weak foreign markets.

Growth was dragged down by a 0.1 per cent quarter-on-quarter slump in the country’s powerful agricultural sector, a key element in its export earnings, compared with 3.0 expansion in the first quarter.

Industry posted meager 0.2 per cent growth compared with a more robust 2.2 per cent increase in the prior three months.

Factors helping expansion included a 1.7 per cent increase in investment and a 1.2 per cent growth in government spending.

Some analysts said they had expected a more drastic slowdown after the central bank’s surprise interest rate cut, questioning whether the easing could aggravate inflation, given the resilience of consumer spending. The bank’s first rate cut in two years raised suspicions in some quarters that it had caved into government pressure to prioritize growth over bringing inflation back to its target of 4.5 per cent.

“The numbers showed a slight deterioration, but investors were probably looking for more negative data that could justify the dramatic shift in the stance of monetary policy that we saw this week,” said Mohamed Mourabet, who oversees 1.2 billion reais ($740-million U.S.) in assets with Sao Paulo-based hedge fund Victoire Capital.

Still, a number of recent indicators have pointed to a gathering slowdown. Brazil’s industrial output in July fell shy of expectations.

This week, Brazil’s main steel industry group cut its forecast for 2011 steel output and Brazil’s largest airline, TAM, said it was reducing its projected fleet at the end of 2012 because of “a more modest market” than expected.