Brazil’s Economic Activity Returns to Growth After Three-Month Contraction

Brazil’s economy grew at its fastest pace in 19 months in November, reversing a three-month contraction, as a recovery in consumer spending helped the world’s second-largest emerging market shrug off a global slowdown. Yields on interest rate futures rose.

Seasonally adjusted economic activity, a proxy for gross domestic product, rose 1.15 percent in November from October, the central bank said in a report published on its website today. The median forecast of 21 analysts surveyed by Bloomberg was for a 0.9 percent gain.

Lower interest rates, measures to boost credit and tax cuts are helping to fuel domestic spending, said Newton Rosa, chief economist at SulAmerica Investimentos. Traders are betting the central bank will cut borrowing costs half a point to 10.5 percent this week, and to 10 percent by May, according to Bloomberg estimates based on interest rate futures.

“Growth is being fueled by domestic demand,” Rosa said, speaking by telephone from Sao Paulo. “The economy rebounded in the fourth quarter, reflecting the stimulus given by the government.”

The increase in economic activity ended three straight months of declines from August through October, the longest contraction since the one that followed the bankruptcy of Lehman Brothers Holdings Inc. in 2008. Since August, President Dilma Rousseff’s administration has cut the benchmark interest rate three times, lowered taxes on consumer goods and eased curbs on credit to try to revive growth and protect Brazil from the European debt crisis.

Futures Yields

The non-seasonally adjusted economic activity index rose 0.79 percent from a year earlier, the central bank said. Analysts surveyed by Bloomberg expected a 0.6 percent increase.

The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, rose two basis points, or 0.02 percentage point, to 10.03 percent at 12:44 p.m. in Brazil. The real appreciated 0.3 percent to 1.7817 per dollar.

The rebound in activity will make it harder for the government to achieve its goal of a benchmark rate below 10 percent, said Jankiel Santos, chief economist at Espirito Santo Investment Bank in Sao Paulo.

“It’s going to become clearer and clearer for everybody that the economy is not showing such a strong deceleration as everyone believed based on the figures from the third quarter,” Santos said in a telephone interview. “It was much more a temporary pause rather than a change in the trend.”

‘International Jitters’

Even so, the central bank will continue to cut borrowing costs at its next two meetings, as “international jitters” following Standard & Poor’s decision last week to cut the ratings of nine euro-region nations will weigh more heavily with policy makers than domestic data, Santos said.

Santos expects policy makers to cut borrowing costs half a point this month, and half a point in March.

Brazil will grow 3.6 percent this year, according to an International Monetary Fund forecast, slower than Russia, China and India, the other so-called BRIC nations. China is also studying measures to shore up consumer spending in the face of a global slowdown, Commerce Minister Chen Deming said this month.

Slowest Pace

Chinese gross domestic product figures to be published tomorrow will show that the world’s second-largest economy grew at an annual pace of 8.7 percent in the fourth quarter, its slowest pace since 2009, according to the median forecast in a Bloomberg survey of 26 analysts.

Brazil’s economy contracted in the third quarter for the first time in more than two years, while industrial output has fallen for five of the last eight months. At the same time, robust consumer spending has helped to prevent a deeper slowdown. Retail sales rose 1.3 percent in November, the fastest pace in 15 months, while Cia. Brasileira de Distribuicao Grupo Pao de Acucar, Brazil’s biggest retailer, last week reported total sales up 20 percent in the fourth quarter.

Economists in a weekly central bank survey published today cut their forecast for 2012 growth to 3.27 percent, from a week- earlier prediction of 3.30 percent, and held their 2013 forecast at 4.20 percent.

To contact the reporters on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net; Andre Soliani at asoliani@bloomberg.net.

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

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