Brazil’s Growth of 2.7% in 2011 Trails BRIC Peers: Economy

Brazil's Central Bank President Alexandre Tombini
Central Bank President Alexandre Tombini. Photographer: T.J. Kirkpatrick/Bloomberg

Brazil’s economy last year registered its second-worst performance since 2003 as higher borrowing costs and a currency that rallied to a 12-year high led it to underperform emerging-market peers China and India.

Gross domestic product expanded 2.7 percent even after growth accelerated in the fourth quarter, the national statistics agency said today in Rio de Janeiro. The median estimate of 32 economists surveyed by Bloomberg was for the economy to grow 2.8 percent.

The GDP figure underscores central bank President Alexandre Tombini’s view that the economy is growing below capacity amid Europe’s debt crisis, reinforcing bets that the central bank may accelerate the pace of interest-rate cuts tomorrow. Growth in Latin America’s biggest economy will gain speed and grow 4.5 percent this year, Finance Minister Guido Mantega said today.

“Brazil is losing international competitiveness,” John Welch, chief strategist for CIBC World Markets, the investment-banking arm of Canada’s fifth-largest bank, said by phone from New York. “They’re blaming all the problems on the exchange rate, but have ignored structural reforms.”

After a 7.5 percent expansion in 2010, Brazil’s growth last year trailed India and China -- its peers in the BRIC group of large emerging markets. Growth in the $2.4 trillion economy also lagged the International Monetary Fund’s forecast of 4.6 percent average growth in Latin America last year, while exceeding the 1.6 percent expansion forecast for advanced nations.

Rate Outlook

Economic expansion slowed as the central bank increased rates through July to combat inflation. Even though policy makers have since reversed course, cutting the Selic rate by 2 percentage points to 10.5 percent to shield the country from Europe’s debt troubles, Brazil’s inflation-adjusted benchmark rate, at 4.3 percent, remains the highest among the Group of 20 richest nations.

Inflation will slow toward policy makers’ 4.5 percent target this year, even as the economy accelerates, Central bank President Alexandre Tombini said in a statement.

Brazil will offset the impact of slower global growth by maintaining a weaker exchange rate, lowering interest rates and taking other steps to stimulate the economy, Mantega told reporters in Brasilia today.

The government will use an “infinite arsenal” of measures to prevent the currency from appreciating, Mantega said.

Global stocks fell for a third day, the longest stretch in two months and commodities retreated as concern mounted the global economy is slowing. The Stoxx 600 Europe Index slid 2.7 percent, extending yesterday’s 0.6 percent decline.

Europe’s economy contracted 0.3 percent in the fourth quarter, the European Union’s statistics office said today, following data yesterday that showed U.S. factory orders declined and China’s announcement of the lowest growth target since 2004.

Manufacturers Hurt

Companies from steelmakers to textile firms struggled last year as the real rallied to a 12-year high of 1.54 against the U.S. dollar in July, reducing the cost of imports. Among the hardest hit was shoemaker Vulcabras Azaleia SA, which said in December it was closing six factories due to import competition.

The economy expanded 0.3 percent in the fourth quarter from previous three months, when it shrank 0.1 percent, the statistics agency said. From the year-earlier, GDP expanded 1.4 percent, with manufacturing dropping 3.1 percent and household consumption up 2.1 percent.

“Brazil is losing its industry, the situation is the worst in years,” said Robson Andrade, head of the Brasilia-based National Industry Confederation. “We’re losing competitiveness because of the strong currency and the Brazil cost,” he said in a phone interview, referring to obstacles to productivity in Brazil such as aging infrastructure, a tax burden of about 36 percent of GDP and a shortage of skilled labor.

Services last year expanded 2.7 percent as unemployment fell to a record low and aggregate income rose, the IBGE said.

Stimulus Measures

The real weakened 1.1 percent to 1.7584 per U.S. dollar. The yield on interest rate future contracts maturing January 2013, the most traded in Sao Paulo today, slid 2 basis points, or 0.02 percentage point, to 9.01 percent at 5:01 p.m. in Brasilia.

President Dilma Rousseff has come to the aid of industry by reducing taxes on consumer goods and boosting public works ahead of the 2014 World Cup and the Summer Olympics two years later. She has also attacked loose lending conditions in Europe and the U.S. for unleashing what she said yesterday in Hanover, Germany, was a “monetary tsunami” fueling currency gains in Brazil and other emerging markets.

“The Brazilian government will take a pro-active position, increasingly expanding sustainable economic growth, while respecting macroeconomic stability with solid public finances,” Rousseff told reporters in Hannover today. “Not only developed nations’ growth rates are suffering, but emerging countries as well.”

Foreign Investment

While manufacturers have struggled, foreign companies betting on strong demand from a growing middle class plowed a record $67 billion in foreign direct investment into the country last year.

The investment rate fell to 19.3 percent of GDP last year from 19.5 percent in 2010. Investments will grow 10 percent this year, Mantega said today.

Auto manufacturers including Anhui Jianghuai Automobile Group Co. from China and Germany’s Bayerische Motoren Werke AG plan to invest an estimated 30 billion reais in Brazil over the next three to five years, according to the Trade Ministry.

The recovery may soon run into capacity constraints that reignite inflation concerns, Alberto Ramos, chief Latin America economist at Goldman Sachs & Co. said before today’s GDP figures. Economists forecast policy makers will have to reverse course and raise rates again next year to prevent inflation from picking up, futures contracts show.

While the pace of price increases is slowing, inflation has remained above the government’s 4.5 percent target since August 2010. In mid-February it stood at 5.98 percent.

Analysts expect Brazil’s economic growth to accelerate to 3.3 percent this year and to 4.15 percent next year, according to a March 2 central bank survey of about 100 economists.

“The capacity for the economy to grow at 5 percent on a sustainable basis without generating inflation is still not there,” Ramos said in a telephone interview from New York.

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