Brazil Growth Short of Forecast for Fourth Straight QuarterDavid Biller and Raymond Colitt
Brazil’s economy expanded less than analysts forecast for the fourth straight quarter, as the government struggles to rebuild investor confidence in the world’s second-biggest emerging market.
Gross domestic product grew 0.6 percent in the fourth quarter, slowing annual growth to 0.9 percent in 2012, less than any major emerging market, the national statistics agency said today in Rio de Janeiro. The quarterly gain compares with the median estimate of a 0.8 percent expansion from 37 analysts surveyed by Bloomberg. GDP rose in the fourth quarter 1.4 percent from a year earlier.
Brazil’s economic expansion slowed for a second straight year in 2012, even as President Dilma Rousseff’s government extended tax cuts, reduced the benchmark rate to a record, pressured banks to lower lending costs, courted private investment and weakened the currency. The extent of the measures has undermined investor confidence in economic policy and regulation, said Enestor dos Santos, senior economist for Brazil at Banco Bilbao Vizcaya Argentaria SA.
“There’s no clarity or confidence in economic policy, there’s an exaggerated interventionism,” dos Santos said by telephone from Madrid. “What’s becoming evident is that it’s not interest rates, tax cuts or cheap credit that will revive growth but a recovery in confidence.”
Swap rates on the contract maturing in January 2015 fell six basis points, or 0.06 percentage point, to 8.30 percent at 1:10 p.m. local time. The real weakened 0.2 percent to 1.9818 per U.S. dollar.
Traders trimmed bets the central bank will increase interest rates this year even as inflation accelerated in the past five months to 6.18 percent in mid-February. Price increases have exceeded the 4.5 percent midpoint of the bank’s target for more than two years.
“It is difficult to imagine the monetary authority justifying a hiking cycle with such disappointing growth performance,” Italo Lombardi, an economist at Standard Chartered Plc, wrote in a note to clients today.
The central bank has maintained the Selic rate at 7.25 percent since October to avoid jeopardizing an incipient recovery without further fueling inflation. Policy makers, who meet next week to decide on interest rates, said in January they planned to keep the rate on hold for a prolonged period.
The measures the government took in 2011 and 2012 are starting to show effect and the economy will grow 3 percent to 4 percent in 2013, Finance Minister Guido Mantega said to reporters today in Brasilia.
Investments, which grew 0.5 percent in the fourth quarter, contracted 4 percent in 2012. Expansion in 2012 was led by a 3.1 percent jump in household consumption.
“It’s important to highlight the recovery of investments in the fourth quarter,” Tombini said in an e-mailed statement. “Domestic demand continues to be the main support of the economy.”
A 5.2 percent drop in agriculture output conceals the fact that fourth-quarter GDP was “not as bad as the number appears,” Marcelo Fonseca, economist at M. Safra & Co DTVM SA, said.
“In 2013, we will probably see the opposite effect: agricultural GDP raising overall GDP,” Fonseca said by phone from Sao Paulo.
Still, the government faces an important choice in order to regain business confidence, said Gustavo Franco, founder of asset manager Rio Bravo Investimentos.
“Something will have to change, and change is something nobody likes,” Franco, a former central bank president, said in Rio de Janeiro before today’s report. “One change could be higher interest rates, another change could be tighter fiscal policy. It’s always better to do one of those things than do nothing.”
Mantega flew to New York this week to drum up interest in the government’s $235 billion program for companies to build and operate 7,500 kilometers (4,660 miles) of highways, 10,000 kilometers of railways, and 159 ports, among other projects. Mantega said profitability on the projects will be “high” and of at least 10 percent.
“There has been some debate regarding rates of return that the government is willing to live with,” said Pablo Fajnzylber, the World Bank’s lead Brazil economist, in an interview from Brasilia before today’s report. “Mantega said they’re willing to be more flexible, so the prospect is for those concessions and public-private partnerships to start being implemented. That could start in 2013.”
Infrastructure investment in preparation for hosting the 2014 World Cup should also provide a natural boost to economic activity, said Paulo Nogueira, who represents Brazil and 10 other Latin American nations at the International Monetary Fund.
“When the World Cup was first announced, there was concern from the more conservative side of the government that this might lead to overheating,” Nogueira, who was not speaking on behalf of the IMF, said by telephone from New York. “At this stage, we would welcome some heat.”
Accelerating consumption this year along with higher investment, particularly in capital goods, will help guide the economy to 3 percent growth, Fajnzylber said. Economists in the latest central bank survey forecast expansion of 3.1 percent.
Still, that would be below Brazil’s 3.6 percent annual average over the past decade and less than forecasted growth for every major economy in the region except Venezuela.
Retail sales rose 7.5 percent in the fourth quarter and 8.6 percent in the year, up from 5.9 percent and 7.2 percent, respectively, in 2011. Consumption has been boosted by a strong job market, higher real wages and consumer credit that rose 10.5 percent last year.
Brazil last year worked to weaken its currency to aid struggling manufacturers. After the currency hit a low of 2.1360 per dollar on Nov. 30, the government reversed course, and since then, the real has appreciated 7.8 percent, the most among major currencies tracked by Bloomberg. The central bank has acted in the markets repeatedly to keep the rate around 2 per dollar.
Before the government enacted capital controls to weaken the currency, “it was impossible for the industrial sector to grow,” Mantega said in an interview in New York on Feb. 27. “With the exchange rate around 2, Brazilian industry can survive.”
Industrial production last year fell 2.7 percent from the prior year, the worst performance among the BRIC group of major emerging markets that includes Russia, India and China, and down from a 0.5 percent increase in 2011.
“The pace of growth is very sluggish and is particularly disappointing in view of huge stimulus the economy had,” Neil Shearing, chief emerging-markets economist at Capital Economics Ltd., said by phone from London. “This is yet more evidence of the need to rebalance away from consumption and toward investment. Until that happens we’re going to end up with disappointing growth data and relatively high inflation.”