Thu Feb 27, 2014 11:21am EST

By Brian Winter and Silvio Cascione
SAO PAULO/BRASILIA, Feb 27 (Reuters) – Brazil’s economy
ended 2013 on a upbeat note thanks to strong consumer spending
and investment, providing a much-needed boost to President Dilma
Rousseff as she tries to rebuild her credibility with business
leaders and win re-election in October.
Gross domestic product expanded 0.7 percent in the fourth
quarter compared to the third quarter, government statistics
institute IBGE said on Thursday. That was more than twice the
amount expected by economists, and it pushed the economy to 2.3
percent growth for calendar year 2013.
Such growth is a far cry from the dynamic 4 to 5 percent
annual levels often seen in the last decade, when Chinese demand
for commodities helped make Brazil a star among emerging
markets. Inadequate infrastructure, high consumer debt and
sagging business confidence have brought Latin America’s biggest
economy back to earth since then, prompting fears of a long
period of stagnant growth ahead, possibly for years to come.
Nothing in Thursday’s data signaled a major pick-up in
activity was in the cards, most economists agreed. U.S. bank PNC
economist Bill Adams called the result “okay but unspectacular.”
Nevertheless, it still ended a string of disappointing
economic news and allowed Brazil to finish 2013 with GDP growth
twice as fast as Mexico, which in recent years has surpassed it
as an investor favorite in the region.
Meanwhile, a 6.3 percent jump in investment last year should
over time help ease some of the bottlenecks holding the economy
back. It will also give Rousseff a major calling card with
business leaders as she tries to atone for policy errors early
in her left-leaning presidency and convince them her second term
will be more market-friendly.
“It was a surprise even for the government,” an upbeat
Finance Minister Guido Mantega told reporters. He said the jump
in investment should allow for a sustained, “gradual recovery.”

Investment was aided by Rousseff’s drive to privatize some
roads and airports, plus strong domestic production of capital
goods. Despite sour sentiment among financial investors, which
caused Brazil’s Bovespa to be one of the world’s
worst-performing stock market indexes last year, businesses have
generally taken a sunnier view of the country’s long-term
prospects, helping foreign direct investment remain strong.
Among 21 economists consulted by Reuters shortly after the
data release, six said they were revising up their 2014 GDP
forecasts based on the strong finish to last year. For example,
Troster & Associates, a consultancy based in Sao Paulo,
increased its forecast to 2.5 percent growth from 1.9 percent.
Still, in almost the same breath, many observers warned
against getting too carried away by optimism.
Retail sales and industrial data suggest this year will be
tough, with several challenges including a severe drought and
problems in neighboring Argentina dragging on activity. Prior to
Thursday, economists had median expectations for 1.7 percent
growth in 2014.

Market reaction to the data was positive. The Bovespa rose
0.9 percent by midday, while Brazil’s currency, the real,
strengthened 0.35 percent.
Business leaders, frustrated by what they see as Rousseff’s
heavy-handed interventions in the economy and excessive
government spending, were also generally muted in their praise.
“The number a bit above the forecast doesn’t change the
investment plans for 2014. Commerce and industry are quite
pessimistic,” said Alfried Ploger, acting president of the
Brazilian Association of Public Companies.
Indeed, the data contained plenty of grist for both bulls
and bears.
On the positive side, household spending expanded 0.7
percent in the fourth quarter compared to the third quarter,
while government spending grew 0.8 percent. For the full year,
agriculture grew 7 percent compared to 2012, thanks to record
sugar cane, soy and corn harvests.
However, industry shrank 0.2 percent in the fourth quarter,
dragged down by a 0.9 percent fall in manufacturing. Brazil’s
factories have been struggling for years with high labor costs,
bad infrastructure and low productivity.
On balance, the data seemed to address, if only partly,
economists’ long-standing concern that Brazil consumes too much
and invests too little. Even with last year’s improvement,
investment accounts for just 18.4 percent of GDP, well behind
regional peers like Peru and Colombia.
“It’s a good result, since there was more investment, and
you could see a reduction in the mismatch between supply and
demand,” said Jankiel Santos, chief economist at Espirito Santo
investment bank in Sao Paulo.
Brazil’s economy had been expected to grow just 0.3 percent
in the fourth quarter compared with the third quarter, according
to the median forecast of 43 analysts polled by Reuters.
The quarterly result represented a strong rebound after the
economy had contracted 0.5 percent in the third quarter. Many
economists believed that growth could have been negative again
in the fourth quarter, which would have meant a recession.
The rise in government spending was also a mixed blessing.
While it helped boost the economy, loose fiscal policy has also
pushed up inflation and raised the threat of a credit downgrade
by ratings agency Standard & Poor’s.
Elevated inflation has dented business and consumer
confidence, prompting the central bank to raise interest rates
off record lows to 10.75 percent in a non-stop
cycle since April last year. It also eroded purchasing power,
leading to the worst year for retail sales in a decade.
The economy grew 1.9 percent in the fourth quarter compared
with a year earlier, IBGE said.
For a breakdown of Brazil’s GDP data by sector, see