April 16, 2012 7:55 pm

Focus on rate cut as Brazil struggles with slowdown

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Brazil’s economy remained near stagnant in February as one of the world’s most dynamic emerging markets struggles to shake off a deep slowdown.

Real gross domestic product declined 0.23 per cent compared with January, according to a central bank economic activity index. In year-on-year terms the economy grew less than 1 per cent.

The figures set the stage for another cut in interest rates when the central bank’s monetary policy committee meets tomorrow.

“While the government announced a few stimulus measures in early April in an attempt to reverse falling industrial activity and weakening credit markets, we believe they are likely to boost growth only temporarily,” said Nomura economist Tony Volpon.

Brazil’s economy slowed abruptly in the second half of last year after the central bank tightened the benchmark Selic interest rate. This was to cool the kind of overheating seen in 2010, when the economy grew at 7.5 per cent. Concern over the eurozone crisis has exacerbated the slowdown.

After contracting slightly in the third quarter of 2011, the economy has crawled back to life but industry remains weak amid complaints that a strong exchange rate makes Brazilian goods uncompetitive.

The slowdown in factory output has led President Dilma Rousseff to campaign against competitive devaluations of global currencies, which she blames for the lack of competitiveness of Brazilian industry. She remains popular, however, because of record low unemployment.

To try to revive the economy, the central bank has cut the benchmark Selic interest rates five times from a peak of 12.50 per cent to 9.75 per cent and is expected to cut it by another 75 basis points on Wednesday.

While the central bank is expected to pause at 9 per cent, the government has begun putting pressure on state and private banks to lower the interest rates they charge to help stimulate demand and ease the pressure on businesses.

In spite of the bad news, economists expect the economy to recover more quickly in the second half of last year.

But economists are predicting that Brazil’s economy is slowly recovering from the depths of the third quarter and is on track to deliver growth of slightly more than 3 per cent this year.

“The outlook for domestic demand is positive given ongoing central bank easing, solid credit flows … a very tight labour market, large double-digit increase in the minimum wage, targeted fiscal incentives to consumption, and strengthening consumer confidence,” Alberto Ramos, economist at Goldman Sachs, said in a note to clients.

But concern persists that the tight labour market will lead to a resurgence of inflation once the economy begins to recover.

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