MercoPress. South Atlantic News Agency

Brazilian economy slows down but still expands at annualized 8.9%

Strong domestic demand in electoral year is boosting the economy

Brazil's economy grew 8.8% in the second quarter compared to the same period a year earlier due to strong domestic investment. The government statistics agency IBGE said Friday that capital spending spiked 26.5% in the April-June period compared to the same period last year.

That is a signal Brazilian companies are ramping up production to meet strong internal demand. For the first six months of 2010 the economy grew 8.9% over the same period a year ago.

GDP grew 1.2% in the Q2 from the previous quarter, compared with a 2.7% expansion in the first quarter. The Brazilian Finance Ministry had forecast a weaker growth of between 0.5% and 1% for the second quarter after the government began phasing out programs that encouraged expansion during the global financial crisis.

The central bank this week voted to hold the benchmark Selic interest rate unchanged at 10.75%, citing lower inflation risks as economic growth slowed from its fastest pace in 15 years during the first quarter.

However Friday’s stronger-than-expected report is reinforcing market bets that “the central bank will be forced to resume tightening right after the elections, or in the first quarter of 2011,” said Zeina Latif, senior economist for Latin America at RBS Securities Inc. in Sao Paulo.

The Brazilian currency has strengthened 8% against the U.S. dollar in the last 12 months and stands at 1.7235 per dollar.

Consumer demand rose 0.8% from the previous quarter, while government spending rose 2.1%. Investment expanded 2.4% from the previous quarter and 26.5% from a year ago, the biggest jump since the series began in 1996.

The second quarter reading puts Brazil on a growth path “more compatible with long-term equilibrium”, the central bank said in a statement on its website. The bank expects GDP to grow 7.3% in 2010, the statement said, unchanged from the forecast in its quarterly inflation report published June.

Imports jumped 38.8% from a year ago, five times the 7.3% increase in exports, as consumers took advantage of a strong currency to travel and increase purchases abroad.

GDP will expand 7.09% in 2010, according to a central bank survey of about 100 economists published this week. The economists cut their forecast from 7.2% in July.

Slower growth in the second quarter came after industrial output fell from the first three months of the year, and vehicle sales slumped 21.5% in April from the previous month after tax breaks expired.

Brazil’s consumer prices unexpectedly fell last month, taking the annual inflation rate to 4.44% through mid- August, below the government’s 4.5% target for the first time since January. But even as 2010 inflation slows, forecasts for next year have risen to 4.87% from 4.8% four weeks ago, according to the central bank survey.

Finance Minister Guido Mantega said in a conference call with reporters that he expects economic growth to slow in the second half of the year and Central bank President Henrique Meirelles said August 18 that the economy will heat up again in the third quarter.