Brazil GDP Grows at Half Forecast Pace as Investment Dives

Brazil GDP Expands Less Than Forecast as Investment Plunges
While the efforts have spurred record car purchases and are keeping retail sales buoyant amid a global slowdown, companies are holding back on investment. Photographer: Dado Galdieri/Bloomberg

Brazil’s economy expanded in the third quarter at half the pace forecast by economists, as government stimulus efforts fail to revive investment that fell for the fifth straight period. Rate futures and stocks plunged.

Gross domestic product grew 0.6 percent in the third quarter, the national statistics agency said today in Rio de Janeiro. That was less than the forecasts of all 54 economists surveyed by Bloomberg whose median estimate was for a 1.2 percent expansion.

President Dilma Rousseff’s government has slashed interest rates to record lows, cut taxes and boosted spending over the past 12 months to prop up an economy heading toward its worst two-year performance in a decade. While the efforts are keeping retail sales buoyant amid a global slowdown, companies are holding back on investment. With growth still patchy, the government is now focusing on reducing production costs.

“Today’s report was awful,” Neil Shearing, who was forecasting below-consensus 1 percent growth as chief emerging markets economist for Capital Economics Ltd., said by phone from London. “The really disappointing thing about today’s data is that despite all the policy stimulus over the past year, it’s clear the economy is still struggling to get going.”

Lower Estimates

Growth on an annualized basis was 2.4 percent in the third quarter, after the government reduced by about half its first and second quarter GDP estimates. That’s below a government forecast this month of 4.7 percent and the worst performance in the BRIC group of major emerging markets that includes Russia, India and China. It was also less than the U.S., which expanded 2.7 percent in the third quarter. GDP expanded 0.9 percent from a year earlier.

Interest-rate futures fell across the board after the release of the report. Yields on the contract maturing in January 2014, the second-most-traded in Sao Paulo, fell nine basis points to 7.22 percent at 2:03 p.m. local time. The real declined for a fourth straight day as investors speculate the government may step up efforts to weaken the currency to aid manufacturers.

Brazilian stocks fell as well. The benchmark Bovespa stock index fell as much as 1.7 percent before paring declines to trade down 1.4 percent at 57063.38 at 2:05 p.m. local time.

Even though quarterly growth was the fastest since the first quarter of 2011, investment fell 2 percent in the July-September period to 18.7 percent of GDP. Consumer spending rose 0.9 percent, while the services sector was flat. Agricultural activity led all industries, expanding 2.5 percent.

Forecast Maintained

While the GDP number was not what the government was hoping for, the economy is accelerating and will expand by 1 percent in the fourth quarter, Finance Minister Guido Mantega said. The government is maintaining its forecast for 4 percent growth next year, he said at a news conference in Sao Paulo.

“The surprise was the performance of the service sector,” Mantega said. “Financial transactions had a negative impact on growth.”

Both the government and economists underestimated the impact of reduced interest rates, Mantega said. Falling bank loan spreads resulted in lower revenue, and the banks did not compensate for that with a larger volume of credit, he said.

Brazil’s third-quarter growth indicates continuing recovery of the economy in the second half, the central bank said in a statement. “Even facing a still complex international atmosphere, perspectives point to intensification of the rhythm of activity in the coming year,” the bank said in the statement.

Modest Growth

At the current level of investment, the government will have trouble reaching its goal of delivering 4 percent growth next year. Even the more modest growth forecast by economists this year of 1.5 percent may have to be revised downward, said Vladimi Caramaschi, chief strategist at Credit Agricole SA’s Brazilian unit.

“After so much stimulus, investment is even worse than in the second quarter,” Pedro Tuesta, senior Latin America economist at 4Cast Inc., said by telephone from Washington. “If investment doesn’t rebound, then we are in trouble in 2013.”

Rousseff has started addressing longstanding bottlenecks, promising on Sept. 11 to take Brazil into a “new phase” of development, one focused on boosting competitiveness.

In recent months the government has eliminated payroll taxes for dozens of industries, overhauled the electricity sector to cut rates by as much as 28 percent and unveiled plans to auction control of ports, roads and airports. Mantega told Globo News TV on Nov. 12 that for growth to double next year investment must accelerate.

“This is very welcome, though unfortunately what brought Brazil to this state of affairs of weaker investment is something that built up over years,” Andre Loes, chief Latin America economist at HSBC Bank Brasil SA, said before today’s report. “It’s going to take time for these measures to show results.”

Retail Sales

Automakers, a mainstay of the economy, will invest $22 billion over the next three years, Mantega said Oct. 4. His comments came as the government offered tax breaks for carmakers to expand production. Among the companies benefiting are Volkswagen AG and Honda Motor Co Ltd.

Vehicle sales reached a record 420,080 units in August on the back of sales tax reductions that Rousseff in October extended to year-end. Retail sales rose for the fourth straight month in September and jumped 8.5 percent from the year before. Underlying the strong performance is strong credit growth of 16.6 percent in October and unemployment that has remained near record lows all year.

Still, industrial output fell in September for the first time in four months on a drop in machine and equipment investments.

Inflation Risk

Even as the economy struggles to revive -- economists surveyed by Bloomberg are forecasting 1.5 percent growth this year -- inflation is quickening. Consumer prices as measured by the IPCA index rose 5.45 percent in October from a year ago, and inflation is projected to stay above the government’s 4.5 percent target through at least 2013, according to the latest central bank survey.

Government attempts to weaken the real, which has fallen 11.4 percent against the dollar this year, more than any of the 16 major currencies tracked by Bloomberg, could exacerbate the price pressures, said Carlos Thadeu de Freitas Gomes, chief economist at the Rio de Janeiro-based National Commerce Confederation.

Higher Inflation

“The government is looking at growth, and that means accepting higher inflation in the short term,” said Freitas, a former central bank director. “If inflation passes 6 percent, I think the bank will stop looking at growth and will turn to inflation.”

The central bank has responded to the price threat by ending a rate cut cycle initiated in August 2011 that was the most aggressive by any Group of 20 nation. The bank, in deciding this week to leave its benchmark Selic rate unchanged at 7.25 percent, pledged to keep monetary conditions stable for a “prolonged period.”

“It’s now completely clear that we won’t see any increase in the Selic rate in 2013,” Andre Perfeito, chief economist at Gradual Investimentos, said by telephone from Sao Paulo. “It’s impossible, because investments are at a really low level. If it weren’t for consumption of households, we would have had even worse growth in the third quarter.”

Following release of today’s data, Perfeito revised downward his 2012 GDP growth forecast to just under 1 percent from 1.3 percent previously.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE