May 31, 2014

Rio de Janeiro: 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 per cent in the first quarter, the equivalent to 0.8 per cent on an annual basis, down from a revised 0.4 per cent 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 per cent 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 2017, the most traded in Sao Paulo today, rose five basis points, or 0.05 percentage point, to 11.73 per cent at 11:34 a.m. local time. The real weakened 0.8 percent to 2.2418 per US dollar.

Brazil, which generates about 80 per cent 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.

Brazil is “going toward very anemic economic growth with inflation still running at a high level,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by telephone before the number was released. “The first figures for the second quarter are not pointing to a recovery.”

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.

Below Average

The central bank on May 28 kept the benchmark Selic interest rate unchanged at 11 per cent 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 per cent.

Brazil’s expansion will ease to 1.8 per cent in 2014 from a revised 2.4 per cent last year, according to the economists’ estimates.

That would be less than the Latin American average for the fourth straight year and shy of the global average by nearly a full percentage point.

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 ($305 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 per cent, according to the data released today.

“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. (CMI), said in an earnings call on April 29. 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 per cent inflation, plus or minus two percentage points.

The real has depreciated 5.8 per cent 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 per cent from 43 per cent 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 per cent. They also forecast GDP will grow by less than 2 per cent 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.”

Meanwhile, Brazil’s economy barely grew in the first quarter as investment plunged, reflecting a broad malaise that has stirred recent labor unrest and street protests as President Dilma Rousseff seeks a second term.

Data released by the government on Friday was for the most part like a broken record of the last three years in Brazil: Shrinking factory output, falling investment and flat consumer spending, while a good performance by agriculture and heavy government spending ahead of the October election tilted the overall balance toward modest growth.

Gross domestic product grew 0.2 percent from January to March compared to the previous quarter, statistics agency IBGE said. That was a slower rate than 0.4 percent growth in the fourth quarter, a number that was revised downward.

“I couldn’t find anything positive at all in the (data),” said Bruno Rovai, an economist at Barclays.

He and other economists said falling confidence among investors and consumers, plus rising inventories, likely spelled continued weak activity through 2014 and probably beyond.

After a long commodities-fueled boom last decade, Brazil’s economy has fallen from grace on Wall Street and averaged just 2 percent annual growth under Rousseff’s left-leaning policies.

Unemployment remains near record lows while poverty continues to fall, and many Brazilians are still happy with the gains they’ve made over the past decade. That helps explain why Rousseff retains a healthy lead over her two more centrist main opponents in polls ahead of the Oct. 5 vote.

Still, many voters, especially those in the middle class, are frustrated by bad infrastructure and 6 per cent annual inflation eating away at their wages — and they’ve been increasingly inclined to vent their anger via strikes and street protests.

Possible unrest during the World Cup, which starts on June 12 in Sao Paulo, is a big concern for the government and world soccer body FIFA as the economic tensions mix with Brazilians’ anger over public money being spent to host the tournament.

The World Cup will provide a needed boost to Latin America’s biggest economy as some 600,000 foreign tourists are expected to attend for a month of games and parties. The government expects the event will goose GDP by 0.5 percentage points, while private economists expect a more modest 0.2 percentage-point increase.

Nevertheless, economists on average have said they expect GDP to grow just 1.6 per cent in 2014 — and some said they would lower their forecasts once they fully analyze Friday’s data. Fixed investment fell for a third straight quarter, down 2.1 per cent compared to the fourth quarter. Investment now accounts for 17.7 per cent of Brazil’s GDP — one of the lowest rates in Latin America, helping explain the lousy ports, roads and public services that have drawn many protesters’ rage.

Household spending shrank 0.1 per cent compared to the previous quarter, its first decline in nearly three years. Industry shrank 0.8 per cent, while agriculture grew a healthy 3.6 per cent.

Government spending was the other bright spot, expanding 0.7 per cent. Rousseff’s support among many voters is underpinned by her government’s welfare and housing construction programms.

However, analysts have blamed the heavy budget spending for fueling inflationary pressure — which has in turn forced the central bank to sharply hike Brazil’s benchmark interest rate to its current level of 11 per cent, among the world’s highest. Many economists say that only an ambitious overhaul of Brazil’s complex tax code and other structural reforms could return the economy to its glory days of 2002-10, when GDP often grew better than 5 per cent a year.