Brazil Growth Slows, Risks Falling Behind

Top Quote Provideo Financial Report: Latin America's largest economy is reacting as expected to a series of interest-rate increases and other measures implemented by the government in late 2010 and early 2011, designed to contain inflation by reining in access to credit. End Quote
  • (1888PressRelease) September 07, 2011 - Brazil's central bank unexpectedly cut the country's key interest rate to 12% from 12.5% last week, saying high debt and weaker growth in developed economies could impact on Brazil. Brazil's GDP expanded 0.8% compared with the first quarter of this year and 3.1% over the same period a year ago. Second quarter data shows that Latin America's largest economy is reacting as expected to a series of interest-rate increases and other measures implemented by the government in late 2010 and early 2011, designed to contain inflation by reining in access to credit. The softer pace to growth has the government and economists lowering expectations for GDP expansion in 2011. Since the beginning of this year, Brazil's government has adopted a series of measures meant to cool down the economy and contain inflation. As well as the five interest rate rises, the government announced in February it would implement 50bn Reals ($31bn; 19bn) of spending cuts. Other anti-inflation measures have included a big increase in banks' reserve requirements to hold back lending. The Brazilian economy, Latin America's largest, grew more than 7% in 2010 and is expected to grow by about 5% this year.

    Slower growth signals that Brazil, which has been a rare bright spot in the struggling global economy, risks falling behind fellow fast-growing emerging markets such as China and India. It could face further weakening of corporate profits and a continued slump in the Bovespa stock index (BVSP) that is already one of the world's weakest markets this year. Finance Minister Guido Mantega said Brazil was likely to maintain strong economic growth despite a weaker international outlook, forecasting solid growth in both 2011 and 2012. That should put Brazil's economy on pace to end 2011 with growth closer to 4% than the 4.5% previously expected, the minister added.

    Growth was dragged down by a 0.1 percent quarter-on-quarter slump in the country's powerful agricultural sector, a key element in its export earnings, compared with 3.0 expansion in the first quarter. Industry posted meager 0.2 percent growth compared with a more robust 2.2 percent increase in the prior three months. Factors helping expansion included a 1.7 percent increase in investment and a 1.2 percent growth in government spending. Some analysts said they had expected a more drastic slowdown after the central bank's surprise interest rate cut, questioning whether the easing could aggravate inflation, given the resilience of consumer spending. The bank's first rate cut in two years raised suspicions in some quarters that it had caved into government pressure to prioritize growth over bringing inflation back to its target of 4.5 percent. The country's massive industrial segment has struggled with a surge in cheap imports, which have flooded into Brazil because of the strength of the Real. The currency has gained more than 10% against the US dollar over the past 12 months. Imports were up 14.6% year-on-year in the second quarter versus 6.1% growth in exports.

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