Brazil Economy Stalls As President Rousseff Boosts Growth

Brazil Worker's Party President Dilma Rousseff won the national run-off elections in the South American state whose economic and political influence is growing throughout the region and the world., a photo by Pan-African News Wire File Photos on Flickr.

Brazil Economy Stalls as Rousseff Boosts Growth

December 06, 2011, 10:24 AM EST
By Alexander Ragir

Dec. 6 (Bloomberg) -- Brazil’s growth stalled in the third quarter, a sign that the world’s second-largest emerging economy lost momentum even before the government acted to contain the spillover from Europe’s debt crisis.

Gross domestic product failed to grow from the previous three months for the first time since the first quarter of 2009, according to the national statistics agency, as credit curbs, higher borrowing costs and budget cuts checked demand. The economy grew 2.1 percent from the same period a year ago.

As Europe’s crisis deepens, President Dilma Rousseff’s government is taking steps to reinvigorate the economy with a mix of tax cuts, interest rate reductions and looser bank lending requirements. While Finance Minister Guido Mantega is targeting 5 percent growth next year, economists have steadily reduced their forecasts and see growth of less than 3.5 percent in 2012, according to weekly central bank surveys.

“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.”

Bread and Pasta

Mantega told reporters on Dec. 1 that Brazil will slash 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. The announcement came a day after the central bank cut the benchmark interest rate for a third consecutive time since August to 11 percent.

“We need to prevent the contagion of the external crisis, and we are preparing to grow about 5 percent next year,” Mantega said after announcing the tax cuts. “Brazil’s domestic market is our strength.”

Brazil, after expanding faster than most emerging markets last year, will underperform its 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.

Investors Flee

Brazil’s real sank 12 percent against the dollar since June 30 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 this period, extending its decline for the year to 15 percent. Brazil’s real-denominated bonds 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 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.”

The government is reversing policies from earlier in the year to tame inflation. Policy makers raised interest rates five this year through July, while the federal government slashed 50 billion reais from its 2011 budget. Policy makers also raised taxes in December 2010 on consumer loans and bond purchases by foreigners, a move they reversed last month.

Industrial Production

“The third-quarter data reflect a lagged impact of policy tightening in the first half of the year and also the fiscal policy Rousseff implemented,” said Gustavo Rangel, chief economist at ING Financial Markets in New York. Industrial production “reflects the deteriorating competitiveness of Brazilian industry with the strong currency and cheaper products coming in.”

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 Holding 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.

Sales Slowdown

“The credit measures began to take effect, so industry saw a slowdown in sales,” said Eduardo Galasini, head of proprietary trading at Banco Banif Primus in Sao Paulo. “Then of course, the Europe crisis hurt business confidence and at the same time you saw the currency not letting up.”

Mantega’s rhetoric about economic growth shows that there will be more stimulus to come, Galasini said.

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. “What we expect during times of lower growth is that clients are more attentive in choosing what they want, they’re more cautious.”

Abrupt Reversal

The central bank’s rate increases in the first half of 2011 aimed to cool down the fastest inflation in six years and an economy that grew at a 7.5 percent pace in 2010, the fastest in two decades. Policy makers began slashing rates in August in the most abrupt reversal in monetary policy since 1999, citing a “substantial deterioration” in the global economy.

Bank lending growth in October slumped to its lowest level since January, the central bank said, as a bank workers’ strike interrupted operations and the interest-rate increases began to work their way through the $2.1 trillion economy, the world’s sixth biggest.

Central bank President Alexandre Tombini has said inflation peaked in the third quarter and will fall to the 4.5 percent center of the central bank’s target range by the end of 2012. 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, 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