Brazil's President Dilma Rousseff has blamed a monetary 'tsunami' of cheap money in Europe and the United States for making the country's currency overvalued and causing its exports to become uncompetitive.Ueslei Marcelino/REUTERS
Brazil's economy expanded just 0.2 per cent in the first quarter compared with the final quarter of last year, setting the stage for another disappointing year and casting new doubt on the health of emerging markets.
The low growth, which was less than half what markets expected, marked a third consecutive quarter of weak activity in the world's sixth-largest economy. It will also increase pressure on President Dilma Rousseff to enact much bolder reforms that could reclaim Brazil's mantle as a favourite of global investors.
That reputation has faded since mid-2011 as Brazil failed to cope adequately with the challenges posed by its boom over the past decade. An overloaded transport system, an expensive and underqualified labour force and chronically low levels of investment have combined to hold back the economy.
The data released by the government on Friday showed that, despite numerous stimulus packages enacted by Ms. Rousseff since late last year, investment shrank in the first quarter. Some business leaders say that much more dramatic steps – such as an across-the-board simplification of Brazil's byzantine tax code – are necessary to get the economy back on track.
"The government needs a growth plan. It's not enough to carry out isolated measures because they don't take us anywhere," said Miguel Daoud, director for Global Financial Advisor, a consulting firm.
The worst-performing sector in the first quarter was agriculture, which has been damaged by a severe drought in southern Brazil. While industry did better than some expected, separate and more up-to-date data released on Friday suggested a meaningful recovery in that sector also remains far off.
Taken together, the data seem likely to spark more interest rate cuts by Brazil's central bank and cause another wave of downward revisions to the economic outlook. Economists had already expected growth of just under 3 per cent this year – in line with growth of 2.7 per cent in 2011, and a far cry from the booming 7.5-per-cent expansion in 2010.
"These are signs that, really, GDP [this year]may end up below what people are expecting, what the government's expecting," said Rodrigo Melo, chief economist at Maua Sekular, an asset management firm in Sao Paulo.
Several other big emerging markets are also sputtering, threatening to deprive the global economy of one of its only sources of fast growth. India reported its slowest quarterly pace of growth in nine years on Thursday, while South Africa may also struggle to reach 3-per-cent growth this year.
Payroll data released in the United States on Friday also added to pessimism about the global economy.
Brazil's problems are to some extent a reflection of problems abroad, including a slowdown in China, its biggest trading partner, and a loss of confidence in the euro zone. Ms. Rousseff has blamed a monetary "tsunami" of cheap money in Europe and the United States for making Brazil's currency overvalued and causing its exports to become uncompetitive.
Yet other Latin American countries have generally held up better, with the International Monetary Fund forecasting the region as a whole will grow 3.7 per cent this year. That suggests that more local factors – such as a lack of investor confidence – are playing a big role in Brazil's woes.
Finance Minister Guido Mantega said on Monday that the economy should accelerate in the second half of this year as interest rate cuts and measures to stimulate credit and relieve high industry inventories take effect.
Private economists also expect some improvement. But a deeper look at Friday's data shows several problems, particularly the chill in investment, that could limit Brazil's prospects going forward.
Spending on capital goods declined 1.8 per cent compared with the previous quarter, the IBGE statistics agency said. Investment over all fell to 18.7 per cent of GDP compared with 19.5 per cent in the first quarter in 2011.
"The plunge in investment is the issue that appears of most concern to us, underscoring that, not only the destocking cycle is hurting the economy, but also that confidence is deteriorating," Mauricio Rosal, an analyst for Raymond James, wrote in a research note.
The farm sector contracted 7.3 per cent compared with the previous quarter after dry weather over the past season dragged down output from Brazil's two most important crops – soybeans and sugar cane.
Industrial output expanded 1.7 per cent from the last quarter of 2011, IBGE said. Yet the HSBC purchasing managers' index for Brazil, a survey released separately on Friday, showed that manufacturing activity contracted for a second consecutive month in May as output and new orders fell.
Household consumption, the driving force of Brazil's economic boom over the past decade, expanded 1 per cent in the first quarter from the previous quarter.
Gross domestic product had been expected to expand 0.5 per cent on a quarter-on-quarter basis, according to the median forecast of 29 analysts polled by Reuters.
Latin America's largest economy grew 0.8 per cent in the first quarter compared with the year-earlier period, IBGE said. That was below expectations of growth of 1.3 per cent, according to the median forecast of 25 analysts in the poll.