Brazil Annual Activity in April Falls First Time Since 2009

Brazil’s economy in April contracted for the first time on an annual basis since September 2009, reinforcing economists’ expectations that the world’s second-largest emerging market will slow for a second consecutive year.

The non-seasonally adjusted economic activity index, a proxy for gross domestic product, fell 0.02 percent from the year earlier, its first contraction in 31 months, the central bank said. Analysts expected a 0.10 percent increase, according to the median estimate in a Bloomberg survey of 18 economists. Seasonally adjusted activity rose 0.22 percent in April from March, when it contracted a revised 0.61 percent.

Brazil’s growth outlook for this year has deteriorated in the past month to 2.53 percent from 3.2 percent, according to the latest central bank survey of analysts. Consumer demand has weakened, with April retail sales growing a less-than-expected 0.8 percent from March and industrial output falling 0.2 percent over the same period as manufacturers continue to lose market share to foreign competitors.

“The recovery is much slower than expected, it’s hard to see the economy growing faster this year than last,” said Joao Mauricio Rosal, chief economist at Raymond James Brasil SA. “People are quite indebted and that’s affecting demand.”

The April figure follows gross domestic product growth in the first quarter of 0.2 percent, less than the median 0.5 percent forecast in a Bloomberg survey of 50 economists.

Other countries in the region have also seen their economies slow recently. Peru expanded at the slowest pace in more than two years in April and Chile’s economic growth slowed to 4.8 percent in the same month from 5.6 percent in the first quarter.

Rising Wages

The government has said that rising real wages, falling interest rates and low unemployment will continue to drive domestic demand and accelerate economic recovery in the remainder of the year.

Policy makers have reduced the benchmark Selic rate by 400 basis points since August, while banks cut their lending rates to help boost economic growth that slowed to 2.7 percent last year from 7.5 percent in 2010. The government has also cut taxes on industrial and consumer goods, including automobiles, to stimulate consumer spending.

“The moment of consumption in Brazil is not over because of the country’s pent up demand,” President Dilma Rousseff said on June 13.

Traders are betting the central bank will reduce the benchmark interest rate to 7.5% by August, according to Bloomberg estimates based on interest rate futures contracts.

Structural Impediments

Still, economic growth may fall short of the consensus forecast of 2.53 percent this year on growing euro zone fears and pessimism about structural impediments to Brazilian growth, Tony Volpon, head of emerging markets research for the Americas at Nomura Holdings Inc, said in a research note today.

“Unfortunately, the exogenous factors hitting the economy in the second quarter, both external and internal, are, if anything, worse than the first quarter,” Volpon said, forecasting 2012 growth of 1.9 percent.

In the first quarter, investments fell 1.8 percent from the previous quarter.

Brazil this year is forecast to grow less than Russia, India and China, the other so-called BRIC countries, according to an April forecast from the International Monetary Fund.

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