MercoPress. South Atlantic News Agency

Brazilian economy expanded 7.5% in 2010; government applies ‘cooling’ measures

The aftermath of loose spending by the Lula da Silva administration during electoral year

Brazil grew at its fastest pace in 24 years in 2010, expanding 7.5% on strong consumer demand but other complementary data also showed the economy is feeling the strains of overheating.

Fourth-quarter growth of 0.7% marked an acceleration from a revised 0.4% in the third quarter, but fell just short of the 0.9%t median forecast of market analysts.

Household consumption, which has been a main pillar of Brazil's economic boom in recent years, rose a brisk 2.5% in the fourth quarter from the previous three months as Brazilians continued their shopping spree.

But industrial output contracted 0.3%, highlighting the burden of a strong national currency on Brazilian businesses, while agricultural production in one of the world's main breadbaskets slipped 0.8%.

Neil Shearing, an economist at Capital Economics in London, said the data confirmed a “modest pickup” toward the end of the year that was driven largely by consumers.

“The bigger concern is that it's a two-speed growth story: consumers remained the key driver of growth and exporters are lagging behind in this recovery,” he said.

The rapid growth last year, driven by record-low unemployment and a confident new middle class of consumers, crowned the presidency of Lula da Silva, who bowed out last year with an approval rating in the upper 80%.

His hand-picked successor Dilma Rousseff now has to deal with inflation running above 6% annually and a fiscal black hole that was largely caused by loose government spending under Lula da Silva that helped her get elected last year.

With the ‘macro-prudential’ package Brazil's economy is expected to slow to a more sustainable pace of below 5% this year as it feels the effects of higher borrowing costs and fiscal belt-tightening. GDP grew 5.0% in the fourth quarter when compared to the year-earlier period.