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Brazil Economy in June Fell Most in More Than One Year

Brazil’s economy in June fell the most in 13 months as retail and industry slumped, indicating a contraction in the second quarter. Swap rates fell.

The seasonally-adjusted economic index, a proxy for gross domestic product, decreased 1.48 percent in June from the prior month after contracting a revised 0.8 percent in May, the central bank said today in a report posted on its website. The median estimate of 29 economists surveyed by Bloomberg was for a 1.5 percent decline.

President Dilma Rousseff’s government is struggling to stimulate the economy through tax reductions and expanded welfare spending as she campaigns for re-election in October. Retail sales and industrial production shrank in June as inflation breached the upper limit of the central bank’s target range. Analysts estimate Brazil this year will post the slowest growth since the 2009 global financial crisis.

“The economy is stagnated,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento, said by telephone. “Sectors that were dynamic such as retail are losing strength.”

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, fell two basis points, or 0.02 percentage point, to 10.81 percent at 11:46 a.m. local time. The real weakened by 0.3 percent to 2.2744 per U.S. dollar.

‘Timely Actions’

The economy shrank 1.2 percent in the second quarter, according to calculations made by Bloomberg based on the central bank data. Today’s index isn’t a projection and doesn’t necessarily mean GDP contracted in the second quarter, central bank economic policy Director Carlos Hamilton told reporters in Sao Paulo today.

The national statistics institute is scheduled to publish official data on second-quarter GDP Aug. 29.

The central bank’s non-seasonally adjusted economic index fell 2.15 percent from a year ago, matching the median estimate of analysts surveyed by Bloomberg.

Brazil’s government in June extended through year-end tax reductions for the purchase of vehicles in a bid to stimulate the economy. That preceded the central bank’s decision last month to reduce reserve requirements to free up an estimated 45 billion reais ($20 billion) for lending.

The central bank will perfect the country’s prudential framework, which requires “timely actions in particular to facilitate investments,” Hamilton said today during a speech in Sao Paulo.

Retail Sales

Retail sales in June fell the most in more than two years, surprising analysts who forecast an increase. Industrial output contracted for the fourth consecutive month as production of capital goods shrank.

Annual inflation in June reached 6.52 percent, breaching the official target range for the first time this year, before easing to 6.5 percent in July. The central bank targets annual inflation at 4.5 percent, plus or minus two percentage points.

Policy makers on July 16 kept the key rate unchanged at 11 percent for the second straight meeting after lifting borrowing costs by 3.75 percentage points in the year through April.

Latin America’s largest economy grew 0.2 percent in the first quarter as a contraction in household consumption and investments offset gains in agriculture. Brazil grew at twice that pace in the last three months of 2013 and 2.5 percent during the entire year.

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