Brazil Fourth Quarter Growth Exceeds All Analyst Forecasts

Brazil’s economy grew in the fourth quarter more than economists forecast as an increase in investment offset a drop in industrial production.

Brazil’s gross domestic product rose 0.7 percent in the fourth quarter from the prior three months after contracting 0.5 percent in the third quarter, the national statistics agency said today in Rio de Janeiro. That is above every forecast from 49 analysts surveyed by Bloomberg, whose median estimate was for 0.3 percent growth. Brazil’s GDP expanded 2.3 percent in 2013.

Today’s data will help boost lagging confidence in the world’s second-biggest emerging market, according to Jankiel Santos, chief economist at Banco Espirito Santo de Investimento. President Dilma Rousseff has overseen the slowest three-year growth period in a decade, with above-target inflation eroding consumer and business confidence. Policy makers led by central bank President Alexandre Tombini halved the pace of key rate increases yesterday as they work to tame inflation without further jeopardizing growth.

The number will “curb the pessimistic wave we’re seeing in terms of downward revisions of forecasts for 2014,” Santos said by phone from Sao Paulo. “The central bank is going to really celebrate this number.”

Swap rates on the contract maturing in January 2015 fell five basis points, or 0.05 percentage point, to 10.97 percent at 1:25 p.m. local time. The real strengthened 0.8 percent to 2.3308 per U.S. dollar.

Benchmark Rate

The central bank’s board voted yesterday unanimously to raise the benchmark Selic rate by a quarter-point to 10.75 percent from 10.50 percent, bringing the increase since last April to 350 basis points. The bank, which had lifted the key rate by half a percentage point in the previous six meetings, signaled that the tightening cycle is close to an end.

While inflation slowed to 5.59 percent in January, the lowest rate in 14 months, it has remained above the 4.5 percent target since August 2010. Economists polled weekly by the central bank forecast inflation will accelerate to 6 percent in December and the Selic will be lifted to 11.25 percent.

“Monetary tightening has the benefit of controlling or perhaps reducing inflation and that creates favorable growth conditions,” Finance Minister Guido Mantega told reporters in Brasilia today. “Based on the fiscal policy we announced and the central bank’s monetary policy, long-term interest rates can fall and those are the reference for investors. They look long-term.”

Rising prices and reduced disposable income have hurt consumer demand. Coca-Cola Co. had a “disappointing” 6 percent decline in fourth-quarter sales volume in Brazil, Chief Executive Officer Muhtar Kent said on an earnings call Feb. 18.

Investment Rate

President Dilma Rousseff says the government is working to bring inflation back to its target and has pledged to boost investments by carrying out a $289 billion infrastructure drive.

Fourth quarter growth exceeded forecasts and was “very satisfactory,” Mantega said. The 6.3 percent growth in investment through 2013 was “excellent,” he said.

Last year, Brazil’s investment rate was 18.4 percent of GDP, compared with 18.2 percent in 2012, according to today’s report. Investment grew 0.3 percent in the fourth quarter from the previous period, following a 2 percent contraction in the third quarter, the report said. Investment fell 4 percent in 2012.

Family consumption rose 2.3 percent in 2013 following a 3.2 percent gain in 2012. Exports rose 2.5 percent from the previous year, and industry grew 1.3 percent.

“The changes in the composition of supply and demand strengthened prospects for continuing the current growth cycle this year and in coming years,” Tombini said in an e-mailed statement after release of today’s data. “This process tends to be supported by the Brazilian economy’s solid fundamentals.”

Lower Confidence

Industrial confidence in February fell to the lowest level in seven months, while consumer confidence the same month plunged to the weakest since May 2009, according to data published by the National Industry Confederation and Getulio Vargas Foundation, respectively. Industry contracted 0.2 percent from the previous quarter, according to today’s data.

Earlier this month, Latin America’s largest lender, Banco Itau Unibanco Holding SA, revised its 2014 growth forecast down to 1.4 percent from 1.9 percent. Last week BNP Paribas Brasil SA cut its forecast to 1 percent from 1.5 percent.

“Fourth-quarter growth is not going to set a pattern for upcoming quarters,” Newton Rosa, chief economist at Sul America Investimentos, said by phone from Sao Paulo. “Brazil’s economy is showing stagnation.”

To regain investor confidence after Standard & Poor’s and Moody’s Investors Service lowered their outlook on Brazil’s rating last year, the government said it will cut 44 billion reais ($18.8 billion) from its 2014 budget. The reduction will slow inflation and help monetary policy be “less severe,” Mantega said earlier this month.

Deteriorating Finances

The rating companies said deteriorating public finances and slower growth prompted the change in the outlook.

The primary surplus in 2013, which doesn’t include interest payments, was 1.9 percent of gross domestic product, compared with the 2.3 percent target. The government plans to post a 1.9 percent target again this year, Mantega said.

“Everybody’s been talking about recession these days in the country, and a positive number is a relief,” Roberto Padovani, chief economist at Votorantim Ctvm, said by phone from Sao Paulo. “The recession wasn’t confirmed, and maybe we can hold some growth. It is important in building up better expectations.”

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