TOPSHOTS Aerial view of Christ the Redeemer statue, in Rio de Janeiro, Brazil, taken on June 26, 2014. AFP PHOTO / YASUYOSHI CHIBAYASUYOSHI CHIBA/AFP/Getty Images

Brazil’s economy crawled out of technical recession in the third quarter, boosted by government spending, but the low rate of growth highlighted the challenge facing the country’s newly appointed economics team.

A day after President Dilma Rousseff confirmed former Treasury secretary Joaquim Levy as her finance minister, the government statistics agency said the economy grew 0.1 per cent quarter on quarter in the three months to Sept 30 and shrank 0.2 per cent compared with a year earlier.

“The Brazilian economy is showing solid macroeconomic fundamentals and has all the conditions to grow more intensely in the fourth quarter, guaranteeing and amplifying the achievements of the Brazilian population, especially for the working and low income population,” the finance ministry said.

Extended public holidays associated with Brazil’s hosting of the World Cup coupled with investor uncertainty before elections in October contributed to the lower growth this year.

But economists blame the policies of Ms Rousseff, who won a second four-year term in October in one of the closest elections in a generation on a platform of offering voters low unemployment, pay rises and social benefits.

Her government has tried to stimulate domestic consumption with selective tax breaks for industry, state-bank credit and price controls on fuel and energy.

Critics say this has come at the expense of improving the competitiveness of the economy while the government argues that its stimulus programme has staved off the effects of an extended international crisis.

“The successful performance of the labour market in Brazil is the result of the strategy of anti-cyclical economic policies,” the finance ministry said.

Growth in the third quarter was limited by a 1.9 per cent fall in agriculture as a drought affected coffee and sugar crops.

Tight monetary policy to tackle inflation also squeezed credit to families, the finance ministry said. This resulted in a 0.3 per cent fall in private consumption.

The government averted an overall economic contraction in the third quarter by expanding fiscal spending 1.3 per cent quarter on quarter.

The weak, government-supported growth poses a challenge for Mr Levy – a Chicago-trained economist with a reputation for being tough on budget expenses – when he formally takes over the job in January from Guido Mantega.

Mr Levy has promised a primary fiscal surplus – the budget surplus before interest payments – of 1.2 per cent in 2015.

This means he will have to reverse the current situation where economists say – allowing for accounting “tricks” by the government that give the impression of a primary surplus – the budget is showing a primary fiscal deficit.

Growth will have to come from investment but this was weak in the third quarter at 17.4 per cent of gross domestic product, the lowest in eight years.

Despite the challenges, economists welcome Levy’s appointment.

“We continue to see these nominations as a very positive and surprising shift in economic policy, and believe the targets announced have a high likelihood of being met,” said Tony Volpon, economist with Nomura, in an investor note.

He said this should help re-establish investor and business confidence, leading to an eventual return to more robust economic growth.

Get alerts on Brazilian economy when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article