Brazil Growth Slowed in First Quarter as Investment Fell

Brazil’s economic growth slowed in the first quarter as President Dilma Rousseff, who is up for re-election in October, struggles to rebuild confidence that led to the biggest decline in investment in two years.

Gross domestic product increased 0.2 percent in the first quarter, the equivalent to 0.8 percent on an annual basis, down from a revised 0.4 percent in the last three months of 2013. The result was in line with the median estimate of 41 analysts surveyed by Bloomberg. Investment fell 2.1 percent in the quarter.

The central bank this week halted the world’s longest cycle of interest rate increases as it struggles to tame consumer prices without further jeopardizing growth. Under Rousseff, Latin America’s biggest economy has expanded at the slowest average pace for a Brazilian president since Fernando Collor stepped down in 1992. The combination of fast inflation and slow growth is reducing support for her re-election bid.

“The lack of confidence and uncertainty regarding the elections and the possibility of power rationing are again being a drag in terms of investment,” Carlos Kawall, chief economist at Banco J. Safra, said by phone. “We have more trouble ahead.”

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, fell one basis point, or 0.01 percentage point, to 10.85 percent at 1:07 p.m. local time. The real weakened 0.6 percent to 2.2379 per U.S. dollar.

Power Rationing

Fast inflation and a slower U.S. recovery hurt Brazil’s first quarter growth, Finance Minister Guido Mantega told reporters in Sao Paulo today. Brazil already has credit available for investment, and needs a recovery in demand, he said.

“At this time, the government does not expect to take any additional measure to stimulate investment,” Mantega said. “There is already sufficient stimulus for Brazilian investment.”

Brazil, which generates about 80 percent of its electricity from hydroelectric dams, faced this year its worst drought in at least four decades. Reservoir volumes dropped to levels that may force the country to ration energy, according to Enestor dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria in Madrid. Energy Minister Edison Lobao said on May 27 that Brazil has avoided rationing in 2014.

Banco Fibra SA cut its Brazil 2014 growth forecast to 0.8 percent from 1.5 percent after the GDP report, according to an e-mail to clients. That would be the slowest growth since the economy contracted in 2009.

Interest Rate

The central bank on May 28 kept the benchmark Selic interest rate unchanged at 11 percent after lifting it a total of 3.75 percentage points over nine straight meetings. Analysts surveyed weekly by the central bank expect policy makers to continue tightening next year as inflation accelerates.

Growth will moderate in Latin America this year as inflation quickens and a slowdown in China reduces demand for raw materials, according to economists surveyed by Bloomberg. GDP grew less than analysts expected in the first quarter in Mexico, the region’s biggest economy after Brazil. Chile expanded at the slowest pace in four years in the first three months of the year, prompting the world’s top copper producer to cut its 2014 growth forecast to 3.4 percent.

Brazil’s expansion will ease to 1.8 percent in 2014 from a revised 2.5 percent last year, according to the economists’ estimates.

First Downgrade

In March, Brazil suffered its first downgrade in more than a decade. Standard & Poor’s said sluggish economic growth and an expansionary fiscal policy were fueling an increase in the country’s debt levels. It reduced the country’s rating to BBB-, one level above junk.

Rousseff’s administration boosted public spending, reduced payroll taxes and created a 679 billion-real ($303 billion) program to develop Brazil’s infrastructure and oil reserves in an effort to buoy the economy. The president also forced energy companies to cut tariffs in 2013 and restrained fuel price increases to reduce production cost.

Investors and business leaders doubt the government’s management of the economy given a lack of clear guidance and rules, said Roberto Padovani, chief economist at Votorantim Ctvm.

Industry output declined 0.8 percent in the first quarter, while family consumption contracted 0.1 percent, according to the data released today.

‘Basically Confidence’

“The main reason for this deceleration is basically confidence,” Padovani said by phone from Sao Paulo. Lack of “investment is really preventing the country from moving on.”

Industrial confidence dropped in May to the lowest point since 2009, according to data published by the National Industry Confederation. Consumer confidence also has plunged as Brazilians see their purchasing power erode, falling this month to the weakest level in more than five years, according to a survey conducted by the Getulio Vargas Foundation.

A number of manufacturers are planning shutdowns in the second quarter, which will prompt a “sharp reduction” in industry output, Tom Linebarger, Chief Executive Officer of heavy-engine manufacturer Cummins Inc., said in an earnings call on April 29.

Possible Recession

Leading indicators show the economy is decelerating, Eduardo Giannetti, an economic adviser to opposition candidate Eduardo Campos, said in an interview today in Bloomberg’s Rio de Janeiro office.

“The falling investment is very worrying,” Giannetti said. “I wouldn’t be surprised if Brazil faces a recession this year.”

Annual inflation quickened for the fourth straight month in mid-May, reaching a 10-month high of 6.31 percent as education, health care and housing prices increased. The central bank targets 4.5 percent inflation, plus or minus two percentage points.

The real has depreciated 5.8 percent in the past year, the worst performance among 16 most-traded currencies tracked by Bloomberg. Analysts in the central bank survey forecast the real will weaken further, capping the year at 2.45 per dollar.

The government’s approval rating has declined as consumer prices surge, with the number of Brazilians saying the Rousseff administration is doing a good or great job falling to 35 percent from 43 percent in December, according to a poll conducted May 15 to 19 by public opinion research company Ibope. The questionnaire has a margin of error of plus or minus two percentage points.

The analysts surveyed weekly by the central bank estimate inflation will continue to accelerate, closing the year at 6.47 percent. They also forecast GDP will grow by less than 2 percent this year and next.

“Hopes at the end of last year that the economy was over the worst were misplaced,” Neil Shearing, chief emerging-market economist at Capital Economics, said by phone from London. “There’s no easy way out of this.”

(An earlier version of this story corrected the revised GDP growth from last year in the 12th paragraph.)

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