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Brazilian Finance Minister Guido Mantega said on Tuesday, March 6, 2012, that the country 'will implement all the necessary measures to stimulate the economy' after its GDP grew only 2.7 per cent in 2011. (UESLEI MARCELINO/REUTERS/UESLEI MARCELINO/REUTERS)
Brazilian Finance Minister Guido Mantega said on Tuesday, March 6, 2012, that the country 'will implement all the necessary measures to stimulate the economy' after its GDP grew only 2.7 per cent in 2011. (UESLEI MARCELINO/REUTERS/UESLEI MARCELINO/REUTERS)

Brazil vows stimulus after 2011 GDP disappoints Add to ...

Brazil’s government promised aggressive new stimulus measures after data showed the economy expanded just 2.7 per cent in 2011, raising fears that one of the world’s most dynamic emerging markets is slipping into a new era of mediocre growth.

The sharp slowdown during President Dilma Rousseff’s first year in office saw Brazil underperform almost all its peers in Latin America as local industries struggled with soaring business costs and an overvalued currency.

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A rebound in consumer spending and strong agricultural exports only barely allowed Brazil to avoid recession during the second half of the year, the data released on Tuesday showed.

Investors bet the weak performance would lead Brazil’s central bank to slash interest rates more aggressively, with a cut of at least half a percentage point, and possibly 75 basis points, expected following the bank’s meeting on Wednesday.

Finance Minister Guido Mantega pointed to data showing a modest recovery in the fourth quarter that he said is likely to accelerate throughout 2012, while vowing the government would offer tax incentives and other stimulus measures to spur manufacturing and investment in particular.

“We are better placed to give stimulus this year,” Mr. Mantega told reporters in Brasilia. “We will implement all the necessary measures to stimulate the economy.”

The data reinforced the biggest concern of Ms. Rousseff and many business leaders – that Brazil may be shifting down into a prolonged period of lacklustre 3-per-cent annual growth as a tight labour market, woeful infrastructure and other barriers to growth prevent the economy from expanding any faster.

“Things just aren’t taking off,” said Senator Valdir Raupp, the head of the PMDB party, which is part of Ms. Rousseff’s coalition. “Investments aren’t happening. There are just a few sectors where things are going well.”

Stimulus could backfire, too. Inflation reached a seven-year high of 6.5 per cent last year, and while it has slowed in recent months, there may not be much room for the government to jolt the economy without risking another bout of price rises.

“If this year continues at the same rhythm as last year, the (economy) could frustrate us again. Starting now, we’re going to have to give it a boost,” Mr. Raupp said.

Economic activity expanded 0.3 per cent in the fourth quarter, following a revised 0.1-per-cent contraction in the previous quarter, government statistics agency IBGE said.

The biggest drag on Brazil’s economy continues to be industry, which contracted 0.5 per cent in the fourth quarter compared with the previous quarter. Manufacturers have blamed most of their problems on Brazil’s currency, which has strengthened about 40 per cent since the depths of the financial crisis in 2009, and 6 per cent this year.

Ms. Rousseff has implemented targeted tax incentives in recent months to try to help sectors such as autos and consumer goods that have struggled. Her government also has raised the ire of some countries and multinational companies by threatening to raise tariffs on auto imports from Mexico, for example.

Mr. Mantega said the government is still aiming for 4.5-per-cent growth this year. However, many business leaders and politicians say the core problems are more related to high taxes and other costs that will necessitate tough economic reforms to fix – something Ms. Rousseff has shown little interest in doing.

“Worse than the GDP result is the proof that Brazil is becoming an uncompetitive country,” said Senator José Agripino, from the opposition DEM party.

Despite the disappointing result of 2011, the residual glow of recent years means Brazil still feels like a country enjoying an economic boom.

Unemployment remains near record lows, and Ms. Rousseff’s approval rating remains around 70 per cent. Many Brazilians, especially those among the estimated 25 million who have joined the middle class over the past decade, continue to acquire houses, cars and household goods at an unprecedented pace.

But that boom is arguably responsible for the problems occurring now. The tight labour market has driven up costs and made it difficult for businesses to fulfil expansion plans.

One high-profile example is the delayed construction of Brazil’s stadiums to host the 2014 soccer World Cup, which has prompted a public spat with FIFA officials in the past week.

Even a relatively down year was likely to push Brazil past Britain to become the world’s sixth-largest economy. Gross domestic product totalled $2.48-trillion in 2011, based on the average exchange rate, the government said in a statement.

Rafael Bistafa, an economist for Rosenberg & Associados in São Paulo, said the growth in the fourth quarter showed “the worst is past” and that the stage should be set for a light acceleration throughout 2012.

Interest-rate futures fell across the board following the data release, as investors bet that steeper rate cuts would be needed to boost the economy.

Ms. Rousseff and other officials have in recent days blamed rich countries for Brazil’s problems, saying that Europe’s efforts to escape its crisis by flooding the globe with cheap money has caused costs to rise in emerging market nations like Brazil.

By the standards of its peers, Brazil fared especially poorly last year.

Latin American economies are believed to have averaged 4.6 per cent growth in 2011, according to data released in January by the International Monetary Fund.

Brazil also likely finished in last place among members of the BRICS group of emerging market nations, the IMF projections show. The bloc comprises Brazil, Russia, India, China and South Africa.

Brazil may not be able to depend on its usual partners to spur its economy. A less bullish economic outlook for China, Brazil’s main trading partner, and the continued threat of a crisis in the euro zone mean that Brazil may have to continue to rely on its own consumers for growth.

The economy grew 1.4 per cent in the fourth quarter compared to the year-earlier period, IBGE said, in line with expectations of 1.4 per-cent-growth in a Reuters survey.

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