MercoPress. South Atlantic News Agency

Brazil in recession, but mild recovery expected at end of 2009

The Brazilian Central Bank is expected to continue lowering interest rates.

Brazil's economy is showing clear signs of economic recovery though it requires additional fiscal and monetary stimulus to ensure growth this year, said on Tuesday Finance Minister Guido Mantega reacting to the latest data which showed the country had fallen into technical recession.

Earlier in the day official data showed Brazil's economy shrank 0.8% in the first quarter from the previous one, much better than forecasts. This means that Brazil’s GDP contracted 1.8% year-on-year in the first quarter. The economy had contracted 3.6% in the last quarter of 2008, thus completing two successive periods of negative growth, technically defined as a recession.

Mantega said the economy has shown a quick turnaround thanks to resilient domestic demand and vigorous government spending, nevertheless admitting that additional stimulus in the form of interest-rate reductions and tax breaks might be required to revive the economy.

“We will need to make a lot of effort so that we can achieve a positive GDP this year. The government will have to implement monetary policies and anti-cyclical fiscal policies to stimulate growth” Mantega told the press conference. He anticipated he was confident the Brazilian economy will see a mild recovery by the end of 2009.

President Lula da Silva's administration has made available more than 40 billion US dollars in state credit since the intensification of the global credit crisis in September, while the central bank has trimmed borrowing costs to an all-time low.

Mantega also said he saw room for the benchmark Selic rate to fall further without affecting domestic savings returns. The Brazilian Central Bank is expected to slash interest rates by at least 75 basis points later this week.

The central bank has cut interest rates by 350 basis points to 10.25% so far this year, prompting worries there would be a flight of cash from investment funds to tax-free savings accounts as interest rates fell.

According to the latest Central bank survey of financial institution the Brazilian economy is forecasted to contract 0.7%. The economy expanded above 5% last year.

Mantega said there are strong signs that the economy will be able to see a mild recovery by the end of 2009 since preliminary indicators for the services sector have been favourable during the second quarter.

Similarly the agricultural sector is “reacting well” to elevated commodity prices, and there's been an increase in the flow of foreign capital into the country over the last two months, he said.