Brazil’s Economic Growth Disappoints for Fifth Quarter

Brazil’s growth unexpectedly slowed in the first quarter, complicating government efforts to revive the economy as it battles inflation. Swap rates fell.

The economy expanded 0.55 percent in the January-March period, the national statistics agency said today in Rio de Janeiro. Gross domestic product increased less than the 0.9 percent median forecast of analysts polled by Bloomberg, the fifth straight quarter of slower-than-forecast growth. On an annualized basis, the expansion decelerated to 2.2 percent, down from 2.6 percent in the fourth quarter of 2012.

Investors are paring bets the central bank tonight will accelerate the pace of monetary tightening to rein in inflation near the 6.5 percent upper limit of its target range. President Dilma Rousseff’s government over the past year has lowered borrowing costs to a record low, cut taxes and slashed utility rates in a bid to stimulate growth -- so far to little avail.

“The growth deceleration shows that the economic recovery has not manifested itself,” Kathryn Rooney Vera, macroeconomic strategist at Bulltick Capital Markets LP, said by telephone from Miami today. “The plan of attack has not panned out.”

While investment surged 4.6 percent in the first quarter, it’s likely to lose momentum in the coming months as one-time stimulus to boost truck sales fades. Continued gains in investment will also require that domestic demand rebounds, Marcelo Salomon, co-head for Latin America Economics at Barclays Plc, said by phone today. Household spending rose 0.1 percent in the first quarter -- its worst performance since 2011.

Rate Outlook

Thirty-eight of 57 economists surveyed by Bloomberg forecast policy makers today will raise the benchmark Selic rate by 25 basis points to 7.75 percent. Nineteen analysts expect a half-point increase to 8 percent.

Swap rates on the contract maturing in July 2013, the most traded in Sao Paulo today, fell one basis point to 7.56 percent at 1:34 p.m. local time.

“With this GDP figure, the probability that a 25 basis-point increase prevails is stronger,” Andre Loes, chief Latin America economist at HSBC Bank Brasil SA, said by phone from Sao Paulo.

Dragging down growth in the first quarter was a 0.3 percent contraction in industrial output, following two periods of expansion, today’s report showed. Services, which are responsible for the bulk of activity, expanded 0.5 percent.

Finance Minister Guido Mantega said the fact that investment is recovering even as the global economy remains depressed is satisfying. He said the government has no plans to provide additional stimulus as the full impact of payroll tax cuts and other measures are only now being fully felt.

Inflation Outlook

“We’re beginning 2013 much better than we did the start of last year,” Mantega told reporters in Brasilia, downplaying the decline in the annualized growth rate. “What’s to the right of the comma is always revised during the course of the year.”

GDP rose 1.9 percent in the first quarter from a year earlier after expanding 0.9 percent in all of 2012 -- the worst performance since 2009.

Even as the government struggles to revive growth, inflation remains a concern after it exceeded the bank’s target range in March for the first time since November 2011.

Mantega today said that recent weakness in the real, which has declined more than 4.6 percent in the last month, isn’t contributing to inflation pressures and can drive faster growth by boosting exports. As such, the government has no plans to use the exchange rate to tame price increases.


“Other tools exist to combat inflation,” he said. “This is an international shift and there’s no reason we should be different.”

The real extended losses after his comments, falling 1.4 percent to 2.1050 per dollar as of 1:41 p.m. local time.

Brazil is the only country in the Group of 20 nations whose central bank is increasing borrowing costs, and earlier this month Europe, Australia and India all lowered their rates.

Inflation slowed to 6.49 percent in April while still exceeding estimates of all but one of 30 analysts polled by Bloomberg. Central bank President Alexandre Tombini said in a May 21 speech that the monetary authority will act to ensure that inflation slows in the second half of 2013 and next year.

Retail sales contracted for two months in the first quarter as inflation ate away at purchasing power. Monthly consumer confidence has fallen four times so far this year, according to an index published by the Getulio Vargas Foundation.

“Brazil is going through a period of slow growth and fast inflation -- a period of stagflation,” Salomon said. “The weak data on consumption will spark debate that this could be more prolonged than expected.”

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