Brazil Economy Emerges From Slowdown as Stimulus Takes Hold

Brazil Economy Emerges From Slowdown as Stimulus Takes Hold
Cattle owned by Brazilian beef producer Minerva SA graze in a ranch operated by Cia Agropecuaria Monte Alegre (CMA) in Barretos, Brazil. Agriculture grew 4.9 percent in the second quarter, and was the leading contributor to GDP expansion. Photographer: Dado Galdieri/Bloomberg

Brazil’s economy in the second quarter showed signs that it’s turning the corner after a year of stagnation as government stimulus measures help offset the impact of the global crisis.

Gross domestic product expanded 0.4 percent from the previous three months, the fastest pace in a year, the national statistics agency said today. That compares with a median forecast of 0.5 percent growth in a Bloomberg survey of 51 analysts.

While that pace is four times the revised 0.1 percent first-quarter growth, economists say there’s little evidence of a strong recovery. With industrial output falling amid Europe’s debt crisis and weaker demand from China for Brazil’s exports, tax breaks to spur consumption won’t be enough to ensure that growth this year exceeds that of the U.S. and Japan, according to Bloomberg surveys of economists. Brazil’s economy grew at an annualized pace of 1.64 percent in the April-June period.

“We’re a ways away from saying the whole economy is off to the races,” Bret Rosen, a Latin America strategist at Standard Chartered Bank, said in a phone interview from New York. “There are some figures that would lead us to be a little more optimistic, but you don’t want to declare a peak or a trough from just a few data points.”

Industry, Investments

Industrial output fell 2.5 percent in the second quarter due to declines in manufacturing, mining and civil construction, while investment declined 0.7 percent, according to the report.

“Investment fell due to the weak international scenario and domestic demand that’s also weak,” Newton Rosa, chief economist at SulAmerica Investimentos, said by telephone from Sao Paulo. “Betting on expanding production capacity is very difficult.”

Agriculture grew 4.9 percent in the second quarter, and was the leading contributor to GDP expansion. The services sector also expanded 0.7 percent and family consumption rose 0.6 percent.

“Domestic demand remains the primary support of the economy, with families’ consumption stimulated by moderated expansion in credit, by the generation of jobs and revenue,” central bank President Alexandre Tombini said in a statement today.

Lower Levies

To kick start growth that is trailing Russia, India and China, President Dilma Rousseff’s government has cut payroll taxes, lowered levies on cars and appliances and implemented policies that have weakened the real more than any major currency this year. The central bank has done its part by lowering borrowing costs by 500 basis points since last August, more than any Group of 20 nation, taking the benchmark Selic rate this week to a record low 7.5 percent.

“We are of the view that we have now reached the end of the current 13-month long easing cycle,” Alberto Ramos, senior economist at Goldman Sachs & Co., said in a research note today, citing a deteriorating inflation outlook. If the bank further reduces rates, it will be with a final cut of 25 basis points in October, he said.

The government’s stimulus measures have helped boost vehicle sales from 257,887 in April to 364,196 in July, while a 1.5 percent jump in retail sales in June surprised economists by the most since Bloomberg began compiling the data in 2008.

Debt Troubles

Still, lower rates haven’t kept consumers out of debt trouble, suggesting there may be a limit to a recovery led by shoppers. The central bank reported yesterday that the consumer loan default rate rose in July to 7.9 percent, matching a 30-month high.

“That exuberant phase of the credit cycle when there was a lot of catching up to do, that is over,” Paulo Vieira da Cunha, head of emerging markets research at Tandem Global Partners, said in a phone interview from New York. “What you have now is a normal expansion of credit.”

Economists surveyed by Bloomberg forecast Latin America’s biggest economy will grow 1.9 percent this year, less than the 2.15 percent in the U.S. and 2.5 percent in Japan. Finance Minister Guido Mantega said today he sees growth accelerating to 4 percent in the fourth quarter and possibly surpassing 4 percent in 2013.

Extra Stimulus

Vieira de Cunha is more cautious. The former Brazilian central bank board member says the economy would require additional stimulus for growth to remain at or above 4 percent through 2013, and instead expects the pace of expansion to slow to near 3 percent by the end of next year. This week the government extended the tax cuts for vehicles through October, and for furniture and appliances through the end of the year.

The other BRIC nations are also hurting. Russia’s GDP expanded at the slowest annual pace in the second quarter, while China grew the least since 2009. Gross domestic product in India rose 5.5 percent in the second quarter from a year ago, up from the three-year low of 5.3 percent in the previous quarter. Brazil’s economy in the second quarter expanded 0.5 percent from a year ago, lower than the median estimate of 0.7 percent from 47 analysts surveyed by Bloomberg.

Brazil’s second-quarter GDP figures do not reflect the turnaround under way in the third quarter, said Tony Volpon, head of emerging-markets research for the Americas at Nomura Securities.


“A lot of the demand-priming actions that the government was taking do need some time to hit the economy, including lower interest rates, and that’s what we’re seeing now,” Volpon said by telephone from New York. “The argument the market is having now is how big that bounce will be.”

The severity of this year’s slowdown prompted Rousseff to look beyond the consumer-led growth model favored by her predecessor and mentor, Luiz Inacio Lula da Silva, and confront bottlenecks that have long prevented faster growth. Earlier this month, she ignored opposition to privatization by members of her Workers’ Party and announced plans to auction licenses to build and operate 17,500 kilometers (10,850 miles) of roads and railways, a move the government says will attract as much as $66 billion investment over 30 years.

Low growth in early 2012 was “a wake-up call” that is focusing the government on ways to boost productivity, Gray Newman, chief Latin America economist at Morgan Stanley, said by phone from New York. “Brazil’s challenge isn’t just dealing with the cycle.”

High Cost

More policy action to reduce the high cost of business and boost investment is in the pipeline, including a plan to reduce energy costs for manufacturers that will be announced in mid-September, Rousseff said yesterday.

“We won’t be a just nation until we’re capable of being a competitive nation,” Rousseff told a group of business leaders in Brasilia.

This year’s slowdown hasn’t deterred investors. Drawn by the build-up for the 2014 World Cup and Summer Olympics two years later, the country received $38.1 billion in foreign direct investment this year through July, compared with $38.5 billion in the same period last year. Brazil’s benchmark Bovespa stock index has climbed 9.1 percent since this year’s low on June 5.

One reason for the interest in Brazil is pent-up demand from 40 million people who’ve risen out of poverty since 2003 and still are benefitting from near-full employment conditions.

The profits of Brazil’s biggest retailer, Cia. Brasileira de Distribuicao Grupo Pao de Acucar, rose 180 percent in the second quarter from a year ago, while those at Natura Cosmeticos, Latin America’s largest cosmetics firm, rose 14 percent.

Resilient Demand

Still, resilient consumer demand hasn’t proved sufficient to sustain an industrial sector battered by the global slowdown. Industrial output fell 5.5 percent in June from the year before. With prices for Brazil’s iron-ore and other raw materials under pressure from slow growth in China, exports so far this year are down 1.7 percent from 2011 levels.

“The core scenario as it now stands is for the Brazilian economy to reaccelerate,” said George Hoguet, managing director of State Street Global Advisors in Boston, which has $62 billion invested in emerging market stocks. “But if there’s a further hiccup in one of the larger economies in the world, that is going to negatively affect Brazil.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, rose one basis point, or 0.01 percentage point, to 7.84 percent at 1:01 p.m. local time. The real fell 0.84 percent to 2.0312 per dollar.

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