MercoPress. South Atlantic News Agency

Brazilian economy slowing down: growth drops to an annualized 3.1%

Industrial activity was overrun by a flood of cheap imports spurred by the Super Real

Brazil's economy expanded at a softer pace in the second quarter as a strong currency fueled a flood of cheap imports and industrial activity had its worst performance since the third quarter of 2009.

GDP expanded 0.8% compared with the first quarter of this year and 3.1% over the same period a year ago, the Brazilian Geography and Statistics Institute, IBGE announced on Friday.

The 2Q show that Latin America's largest economy is reacting as expected to a series of interest-rate increases and other measures implemented by the government in late 2010 and early 2011, designed to contain inflation by reining in access to credit.

But the softer pace to growth has the government and economists lowering expectations for GDP expansion in 2011.

Brazil's economy should stabilize at current levels in the third quarter before accelerating later in the year, Finance Minister Guido Mantega told reporters in São Paulo on Friday. That should put Brazil's economy on pace to end 2011 with growth closer to 4% than the 4.5% previously expected, the minister added.

Despite the downward trend in Brazil's economy over recent quarters, the IBGE data showed hidden areas of strength. Economic-activity levels in nearly all of the sectors measured by the GDP survey have climbed above the robust levels reached in the second quarter of 2008, right before the financial crisis struck, said Rebeca Palis, an IBGE economist.

The lone holdout is Brazil's industrial sector, which is operating at historically elevated levels but still below the pre-crisis peak, she added.

The country's massive industrial segment has struggled with a surge in cheap imports, which have flooded into Brazil because of the strength of the Super Real. The currency has gained more than 10% against the US dollar over the past 12 months. Imports were up 14.6% year-on-year in the second quarter versus 6.1% growth in exports, the IBGE said.

However in spite of Mantega’s optimism about controlling inflation and sustaining growth in the range of 4.5%, several economists believe the Central Bank will lower its growth estimate for the year to 3.5%

This was one of the motives why the bank decided to lower the basic Selic interest rate earlier this week by fifty points to 12%. The bank estimates that the slowing down of the economy will moderate inflationary pressures, which currently stand above target. The central bank is expected to make public its new growth estimate at the end of September.

Mantega admitted that his ministry and the central bank estimates have been ‘detached’ with the bank more pessimistic about the impact of the international situation on the Brazilian economy.

“The central bank has different forecasts than Finance, and each side adjusts its estimates as facts evolve. They are a little bit more pessimistic, but overall we agree that the international scenario will push economies down, including Brazil”, said Mantega.

But in spite of this, “the government can’t wait for the crisis to reach our shores: if we are expecting the worst, why not take measures now?” added the Finance minister.

The interest cut was praised by Brazil’s major industrial organizations: the Sao Paulo Industries Federation; the National Industries Confederation and the Rio do Janeiro industries’ federation.

The industry lobby said the government should be encouraged to keep lowering interest rates, which are among the highest in the leading economies of the world.