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Brazil's economy slips for 2nd month

Apr 16 2012 16:09 Reuters

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Sao Paulo - Economic activity in Brazil slipped in February for the second month in a row, the central bank said, in data showing that Latin America’s biggest economy remains stagnant despite interest rate cuts and government measures to spur growth.

Brazil has been flirting with recession since the second half of last year as local manufacturers struggle with high business costs and a strong currency - a surprising letdown for an economy that had been among the world’s most vibrant.

While analysts still expect the economy to recover in the second half of 2012, future evidence of weak activity could lead the central bank to follow an expected interest rate cut of 75 basis points this week with another cut later this year.

The Brazilian central bank’s IBC-Br economic activity index fell 0.23% in February from January, in a result in line with median forecasts of a 0.2% drop.

The central bank also downwardly revised January’s month-on-month data to a fall of 0.18% from a previously reported decrease of 0.13%.

Year-on-year data also pointed to sluggishness.

The economic activity index in February was 0.86% above that a year earlier, compared with January’s 1.44% gain over the year-earlier month.

The data point to a quarterly gross domestic product (GDP) growth of 0.5 to 1% in the first quarter, analysts at Santander said, as the IBC-Br expanded an average 0.4% in January and February from 2011’s last three months.

“This negative figure does not change our view of a recovery in economic activity later this year,” said Octavio de Barros, chief economist at Bradesco.

Official first-quarter GDP data will be released by Brazil’s national statistics agency IBGE on June 1. In the fourth quarter of 2011, the economy grew 0.3%.

“No breakdown by activities is available for this index, but we believe falling industrial production should once again be the prime suspect behind the poor growth,” said Nomura strategists Tony Volpon and George Lei in a note.

Industrial output rose 1.3% in February from the month before, partially recovering the 1.5% fall in January, IBGE said earlier this month. Overall manufacturing activity, however, remained weak, with a decline of 3.9% from February 2011.

To help spur economic growth, the central bank has slashed interest rates five times in a row since August. The bank is expected to cut borrowing costs again this week to 9%, just above an all-time low.

President Dilma Rousseff’s government has also taken a string of measures in recent months to ensure that the economy grows more than 4% this year.

These include a mix of tax breaks and subsidised loans for targeted industries, higher import duties, and steps to halt a currency rally that was hurting the competitiveness of Brazilian manufacturers by driving up costs.

All these efforts will not take full effect until at least the second half of this year, analysts warn, forecasting growth of 3.2% this year and 4.3% in 2013, according to the median view in a weekly central bank survey.

Policymakers have pinned hopes on the country’s strong domestic demand to spur growth. Retail sales jumped 9.6% in February from the same month one year ago, but slipped 0.5% from January.
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