The depreciation of the Brazilian real, the worst-performing major currency this year, is helping reignite economic growth in Brazil after a “weak” first quarter, Finance Minister Guido Mantega said.
The real’s 7.8 percent decline against the U.S. dollar this year is reducing imports and helping revive the manufacturing industry, reducing the need for further stimulus, Mantega said in a May 18 interview at his Sao Paulo office.
“In the past six months the real has weakened and, therefore, the competitiveness of Brazilian manufacturers is gradually improving,” Mantega, 63, said. “The economy grew little, was weak from January to March. April wasn’t great either. In May, we are feeling an improvement.”
Economic growth in Brazil, the world’s sixth biggest economy, has been recovering more slowly than anticipated even as the government steps up interest rate cuts and reduces taxes. The economy contracted in each of the first three months of the year, according to central bank estimates, surprising analysts who expected a rebound in March. Definitive first-quarter gross domestic product data are scheduled to be released next month.
Mantega said GDP growth this year will be higher than the 2.7 percent expansion in 2011, adding the economy will expand at a 4.5 percent annual pace in the second half. Without deterioration in the external outlook, Mantega said there’s no need for further stimulus.
Bank Reserve Requirements
The measures taken so far “would be enough, given the trend we are in and as long as the external situation doesn’t deteriorate,” Mantega said.
The government is ready to take further action if needed, he said, adding Brazil is well prepared to weather a worst-case scenario because international and bank reserves are larger than in 2008 and fiscal accounts are solid. The central bank could reduce bank reserve requirements if necessary, he cited as an example, declining to elaborate further.
In April, President Dilma Rousseff ordered tax cuts and other stimulus measures worth about 65 billion reais. The plan included an additional 45 billion reais for the state development bank to step up subsidized loans.
The real dropped 15 percent in the past three months, after having rallied in the first two months of the year. The Brazilian currency fell 0.75 percent to 2.0238 reais per U.S. dollar May 18.
Mantega said the weaker real isn’t a concern for the government and will have only a small impact on inflation, which has exceeded its 4.5 percent target since August 2010, even as it slows. Inflation, as measured by the benchmark index, decelerated to 5.1 percent in April, the lowest in 19 months.
Brazil’s seasonally-adjusted economic activity index, a proxy for GDP, fell 0.35 percent in March, after dropping in January and February, the central bank said May 18. The result was worse than predicted by all 18 economists in a Bloomberg survey, whose median forecast was for growth of 0.49 percent. The report prompted Banco Fator SA and Gradual Investimentos to cut growth forecasts for this year.
Banco Fator will reduce its 2012 growth estimate to less than 2.5 percent from 2.7 percent, Jose Francisco Goncalves, the bank’s chief economist, said in a telephone interview from Sao Paulo.
Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, cut his 2012 growth forecast to 2.3 percent, from 2.7 percent.
A drop in industrial production is offsetting increases in retail sales and slowing the economy’s recovery. Industrial output contracted in the first three months of the year on an annual basis, while retail sales rose in January, February and March.
Mantega said that, while the country will grow less than his initial 4.5 percent forecast, expansion will be faster than in 2011, and inflation will be less.
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