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Brazil's Economy Likely Contracted in the 2nd Quarter, Economists Say

Brazil's Economy Likely Contracted in the 2nd Quarter, Economists Say

08/28/2014

 By Paulo Trevisani 

BRASILIA--Data coming out Friday are likely to show Brazil's economy is on track to have its worst year since the aftermath of the 2008 financial crisis, as steep interest-rate hikes by the central bank have weighed on growth while doing little to rein in inflation.

A number of economists are predicting gross national product likely contracted around 0.5% in the second quarter. Some are also betting that first quarter data will be revised downward to show a slight contraction as well, which would put Brazil into a recession for the first half of the year.

For the year, Brazil's economy is expected to grow by an anemic 0.7%, according to the central bank's weekly survey of 100 economists. That would be the worst performance since 2009, when the economy contracted 0.2%.

Troubling indicators abound. Fewer jobs are being created as weakening growth discourages companies from expanding. Consumers, feeling less secure in their jobs, are spending less, leaving businesses with large inventories. Manufacturing activity is in a deep slump and even a stalwart sector like construction is slowing.

At 11%, Brazil's benchmark interest rate is at its highest level since 2011. The central bank gradually lifted the rate, known as the Selic, from its historic low of 7.25% in April last year in an effort to cool inflation. The bank has a mandate to keep inflation at 4.5% with a two percentage-point tolerance range on either side of that, but inflation has stayed close to 6.5% ceiling. The central bank says it won't come close to the 4.5% target until mid-2016.

"Monetary policy has had more of an impact on GDP growth" than on inflation, said economist Fabio Kanczuk. He says the lag could be long. "It will be some two years until we see a real decline" in annual inflation, he said.

Mr. Kanczuk's pessimism is echoed by other economists in the private sector.

Brazil's government, however, has tried to stress a few bright spots amid the gloom in an election year. "The economy is solid. We have basically full employment," Finance Minister Guido Mantega said earlier this month, blaming external factors for Brazil's malaise. "Global recovery is taking too long," he said.

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