Brazil Economic Recovery Continues But at Slower Pace

Brazil's economy continued to recover from a brief recession earlier this year, but growth in Latin America's largest economy was less robust than expected., WSJ 12/10/2009 9:47:29 AM

Brazil's gross domestic product expanded 1.3% in the third quarter compared with the second quarter this year, the Brazilian Census Bureau, or IBGE.

Latin America's largest economy continued to bounce back from the shrinking GDP figures recorded in the fourth quarter 2008 and first quarter this year, the technical definition of a recession. Growth has been fueled by an aggressive monetary easing cycle, hikes to government spending and tax cuts on consumer goods.

The IBGE, however, did revise downward second-quarter GDP figures, reducing the quarter-on-quarter growth to 1.1% versus the previously reported 1.9% growth.

Brazil's industrial sector once again led the expansion, advancing 2.9% in the third quarter from the second quarter. The service sector also climbed 1.6% quarter-on-quarter.

The country's powerhouse agricultural sector, however, slipped dramatically. Agricultural output tumbled 2.5% in the third quarter.

Year-on-year GDP figures also came in below market expectations. Brazil's GDP shrank 1.2% in the third quarter versus the third quarter 2008. That was worse than the 0.3% decline expected by economists.

Brazil's government was one of the first emerging-market countries to take vigorous steps against the global financial crisis and economic slowdown.

The Brazilian Central Bank slashed 500 basis points off the benchmark Selic base interest rate, starting in January. The monetary easing left the reference rate at its lowest-ever level of 8.75%.

Late Wednesday, the central bank's Copom rate-setting panel once again maintained the Selic at 8.75%. The panel, however, added two qualifiers to its statement that could indicate interest rates will rise earlier than expected in the first half of 2010.

In addition, the government adopted tax breaks for car sales and big-ticket appliances such as refrigerators and washing machines in order to stoke domestic demand. The tax breaks were recently extended into 2010.

The measures have increased consumers' access to credit and increased confidence. Family consumption rose 2.0% quarter-on-quarter, while government consumption also increased 0.5% in the third quarter.

Economic growth should get a further boost heading into 2010 as tame inflation figures should give central bankers enough leeway to hold rates steady into at least the first quarter of next year.

The official IPCA consumer price index rose for a third-consecutive month in November, but the rolling 12-month rate remained below the government's official year-end target of 4.5%. Economists and analysts expect inflation to remain below the target, not only in 2009 but also 2010.

The IBGE also made other revisions to GDP figures. First-quarter GDP was revised upward to a decline of 0.9% from the fourth quarter 2008, up from the previously revised slide of 1.0%.

The fourth quarter was revised upward to a decrease of 2.9% compared with the third quarter versus the previously revised 3.4% tumble. The third quarter 2008 was revised downward to growth of 1.1% compared with the second quarter versus previously revised growth of 1.3%.

In the year-on-year comparison, second quarter GDP was revised downward to a decrease of 1.6% versus the previously reported slide of 1.2% compared with the second quarter 2008. First quarter GDP was also revised downward to a decrease of 2.1% versus the previously reported 1.8% tumble.

Fourth-quarter 2008 year-on-year growth was revised downward to 0.8% versus the previously reported 1.3%.

Brazil Economic Recovery Continues But at Slower Pace