Brazil GDP Surprises With Fourth Quarter Growth on Consumers

Brazil’s economy unexpectedly grew in the fourth quarter, as consumer spending offset declines in investment and industry, keeping the economy from recession in 2014. Swap rates rose.

Gross domestic product rose 0.3 percent from the three previous months, versus a median forecast for a 0.1 percent contraction from 41 economists surveyed by Bloomberg, and down from a revised 0.2 percent growth in the third quarter. Analysts who had forecast stagnation for full-year 2014 were surprised by growth of 0.1 percent, down from a revised 2.7 percent in 2013. The national statistics agency used a new methodology to arrive at the GDP numbers.

Brazil’s President Dilma Rousseff’s government is struggling with above-target inflation, a sinking currency and a record budget deficit as the central bank raises rates. Rousseff and Finance Minister Joaquim Levy have pledged to tighten fiscal discipline in order to lay the foundation for sustainable growth. Economists forecast an economic contraction this year, the first since 2009.

“The better-than-expected number in the fourth quarter is good news, but the drivers of that growth give some cause for concern, particularly the excessive and continued reliance on consumer spending,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd., said by phone from London. “There’s no sign here of the kind of rebalancing that needs to be at the heart of a sustainable recovery.”

Falling Real

Swap rates on the contract due in January 2017 closed Friday up six basis points, or 0.06 percentage point, to 13.53 percent. The real fell 2.1 percent to 3.2497 per U.S. dollar and has weakened 18.2 percent this year, the most among 24 emerging market currencies tracked by Bloomberg.

The fourth quarter posed a challenge for economists because of the statistics agency’s new methodology. Friday marked the first release of quarterly GDP data with the system.

The new tabulation follows recommendations of international bodies including the Organisation for Economic Co-operation and Development, International Monetary Fund and the World Bank, and brings Brazil in line with best international practice, according to Shearing. Because of the changes, the question of whether the economy last year contracted slightly or eked out some growth became less relevant, he said.

’Helped Investment’

“The surprise came mostly because of the change in methodology that the IBGE used,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA, said by phone from Sao Paulo. “That helped investment a little bit, although it continued to fall.”

Family consumption grew 1.1 percent in the fourth quarter and services expanded 0.3 percent. Industry contracted 0.1 percent, while investment dropped 0.4 percent. Investment fell 4.4 percent in 2014 versus the prior year, reaching 19.7 percent of gross domestic product, as industry declined 1.2 percent year on year.

Falling Confidence

Investment fell because of a drop in confidence in the fourth quarter, according to Paulo Vieira da Cunha, chief economist at hedge fund Ice Canyon. Brazil’s business confidence as measured by the National Industry Confederation deteriorated in 2014 and declined further this year, reaching its lowest since records began 11 years ago.

Economists surveyed by the central bank forecast an economic contraction of 0.83 percent this year and growth of 1.2 percent in 2016. While GDP figures revealed deceleration, they mainly showed the economy in transition including the start of a recovery in exports, Finance Minister Levy told reporters in Rio today.

“The economy this year started with less momentum, because 2014 was a year of deceleration,” Levy said. “Our challenge is precisely to create the conditions for us to restart the momentum that weakened during 2014, despite the small quarterly growth we saw in the fourth quarter.”

One headwind for investment this year is rising interest rates. The central bank has raised the benchmark Selic at four straight monetary policy meetings, pushing it to 12.75 percent, the highest since 2009. The highest borrowing costs in six years won’t be enough to prevent annual inflation from accelerating to 8.12 percent by year-end, according to the latest central bank survey of economists.

Faster inflation in this year’s first quarter is largely due to higher prices for regulated items such as gasoline and electricity -- one element of the government’s effort to repair its finances.

Capped Spending

Rousseff’s new economic team has also capped spending by ministries and proposed cuts in unemployment and pension benefits. S&P affirmed Brazil’s credit rating Monday at the lowest investment grade with a stable outlook, citing a “marked adjustment in various policies” to restore credibility.

The consumer spending that kept the economy from falling into recession last year will not play that role in 2015, said Thais Zara, chief economist at consulting firm Rosenberg Consultores Associados. Unemployment in February rose to 5.9 percent, the highest for the month since 2011, and income dropped 0.5 percent from the year before.

“Credit conditions and the labor market will weigh quite a bit on family consumption and cause it to decelerate,” Zara said. Faster inflation will also weaken consumer spending this year, according to Banco Mizuho’s Rostagno.

As the labor market weakens, interest rates rise and inflation accelerates, consumer confidence as measured by the Getulio Vargas Foundation has fallen to a record. On March 15, more than 1 million people took part in demonstrations against the government in cities across the country. In the aftermath, Rousseff’s approval rating fell to 13 percent, according to a Datafolha poll of 2,842 people conducted March 16-17 that had a margin of error of plus or minus two percentage points.

“I’m pretty downbeat on growth,” Daniel Snowden, senior emerging markets analyst at Informa Global Markets in London. “Going forward, the impact of prior interest hikes still to come, cuts to government spending and tax hikes are all combining to make 2015 a lost year for growth.”

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