Brazil's Economy Decelerates to Slowest Pace in a Year in Fourth Quarter

Brazil’s economy expanded at the slowest pace in a year in the last quarter of 2010, cementing expectations the central bank may pause after raising interest rates in April.

Gross domestic product rose 5 percent in the fourth quarter from a year earlier, down from 6.7 percent in the previous quarter. Economists expected 5.2 percent growth, according to the median forecast in a Bloomberg survey of 33 analysts.

The figure shows the economy is cooling as domestic consumption slows and industrial output suffers from weak international demand and a strong real, said Newton Rosa, chief economist at Sul America Investimentos. Policy makers, after raising the benchmark interest rate to a two-year high yesterday, signaled they will lift borrowing costs for a third consecutive meeting in April to contain the fastest inflation in more than two years.

“It’s more comfortable for the central bank to see that the economy is decelerating, and this should help bring inflation closer to the center of the target range,” Rosa said, in a telephone interview from Sao Paulo.

The real, which gained 46 percent in the past two years, rose 0.4 percent to 1.6509 per dollar at 2:16 p.m. New York time. Yields on interest-rate futures contracts maturing January 2012 rose two basis points, or 0.02 percentage point, to 12.55 percent.

Rosa said he may revise his 2011 GDP forecast to around 4 percent from 4.5 percent.

Faster Inflation

Inflation accelerated to 6.08 percent in the year through mid-February, the fastest pace since December 2008. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

“We won’t allow inflation by any means to get out of control,” President Dilma Rousseff told reporters today in Brasilia.

GDP grew 0.7 percent from the previous quarter, compared with a revised 0.4 percent in the third quarter, the national statistics agency said today in Rio de Janeiro. Analysts expected 0.8 percent growth, according to the median forecast from 32 analysts surveyed by Bloomberg.

Industrial activity fell 0.3 percent in the fourth quarter from the previous one, the national statistics agency said. The GDP gain was fueled by a 1 percent expansion in services.

“The economy isn’t growing as fast as everyone thought,” said Jankiel Santos, chief economist at Espirito Santo Investment Bank, speaking by telephone from Sao Paulo. “The number reinforces the central bank’s view that growth is accommodating at a level more consistent with the economy’s potential.”

Benchmark Rate

The central bank raised its benchmark interest rate by half a percentage point to 11.75 percent last night. The government is using a mix of tools, including spending cuts, measures to curb credit and higher borrowing costs, to slow economic growth.

Higher interest rates “will only moderate the pace of demand expansion that was a bit too high,” Finance Minister Guido Mantega told reporters today. “It won’t prevent the economy from growing.”

Latin America’s largest economy expanded 7.5 percent in 2010, its fastest pace since 1985, after registering year-on- year growth of more than 9 percent in the first and second quarters.

Family consumption rose 7 percent last year, while investments jumped 21.6 percent, the statistics agency said

Brazil’s economy is still facing the risk of overheating and the government is aware of that, Dominique Strauss-Kahn, managing director at the International Monetary Fund, told reporters today in Brasilia after meeting with Mantega.

Mantega said domestic demand will continue to drive economic growth this year.

Economists covering the Brazilian economy expect growth to slow to 4.3 percent this year, according to a central bank survey of about 100 economists published Feb. 28.

Rousseff said Brazil will seek “sustainable” economic growth of 4.5 percent to 5 percent a year.

Brazil’s economy entered a “new growth cycle” after the financial crisis of 2008 and 2009 that’s being fueled by domestic demand, central bank President Alexandre Tombini said in an e-mailed statement this morning.

Brazil’s retail sales stalled in December for the first time since April, as lending slowed on higher borrowing costs. Credit in the Brazilian economy expanded in January at its slowest pace in almost two years after the central bank raised reserve and capital requirements in December.

To contact the reporters on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net.

To contact the editor responsible for this story: Bill Faries at wfaries@bloomberg.net

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