Brazil economy recovers from recession on Levy’s fiscal discipline pledge

A ship is docked at the Port of Rio de Janeiro. Brazil’s economy expanded less than forecast as Finance Minister-designate Joaquim Levy pledges to adopt more rigorous fiscal discipline in a bid to improve growth outlook.

Bloomberg

Rio de Janeiro

Brazil’s economy expanded less than forecast as Finance Minister-designate Joaquim Levy pledges to adopt more rigorous fiscal discipline in a bid to restore confidence and improve the growth outlook.

Gross domestic product grew 0.1%, 0.3% annualised, in the third quarter over the three previous months, after contracting 0.6% in the second quarter, the national statistics agency said yesterday. The result, which pulls Brazil from the recession it entered in the first half of the year, was below the median estimate of 0.2% growth from 46 analysts surveyed by Bloomberg.

Brazil’s President Dilma Rousseff promised during her re-election campaign that she would rekindle growth in Latin America’s largest economy and step up the fight against above- target inflation. To do so she named a new economic team, including Levy. The University of Chicago-trained economist said he will narrow the widest budget gap in a decade enough to reduce the country’s debt as a percentage of gross domestic product.

“The worst is behind us in terms of growth, but the situation is still very bad,” Enestor dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria, said by phone from Madrid. “We’re going to see the negative impact of the fiscal adjustment everybody’s celebrating. I view this positively, but in the short term this shock is negative news for growth.”

Swap rates on the contract due in January 2017 rose 13 basis points, or 0.13 percentage point, to 12.20% at 11:45am local time. The real weakened 1% to 2.5561 per US dollar.

Investment rose 1.3% in the quarter, and as a percentage of GDP was 17.4%. Industry output grew 1.7% in the third quarter, while family consumption fell 0.3%, according to the data released yesterday. Family consumption was flat in the second quarter and fell 0.2% in the first quarter.

“If you’re serious about trimming, getting public finances back on an even keel, you either need to trim social spending or raise taxes,” said Neil Shearing, chief emerging-markets economist at Capital Economics “Either way you probably hit consumers harder than you hit other parts of the economy,”

This year’s economic expansion will slow to 0.3% from 2.5% in 2013 in the world’s biggest emerging market after China, according to analysts surveyed by Bloomberg. That would fall short of the Latin American average for the fourth straight year while missing the global average by more than two percentage points. Growth will accelerate to 1% next year, the survey shows.

Levy, former head of asset management at Bradesco, Latin America’s second-largest bank, is replacing Guido Mantega as finance minister. He said yesterday he will tighten fiscal discipline and aim to reduce Brazil’s gross debt as a percentage of GDP over the next three years, adding that government accounts will have transparency. Rousseff also named Nelson Barbosa as her new planning minister and maintained Alexandre Tombini as head of the central bank.

Brazil in October achieved a primary budget surplus, before interest payments, of 3.7bn reais ($1.4bn), the first positive result in six months. In the 12 months through October, the primary surplus reached 0.56% of GDP, compared with the original target of 1.9%. Congress is scheduled to vote next week on a bill that effectively lowers the primary surplus target to zero.

The new economic team will work to avoid the loss of the country’s investment-grade rating. Brazil suffered its first downgrade in more than a decade when Standard & Poor’s in March cut the credit rating to BBB-, one level above junk. Moody’s Investors Service followed in September by lowering its outlook on the Baa2 rating to negative, citing deteriorating fiscal accounts and a slowing economy.

Business confidence is at its lowest since the National Industry Confederation began publishing data in mid-2004. That reflects possible water and energy shortages, higher electricity costs and a corruption scandal that has spread from state-run oil company Petroleo Brasileiro to private construction companies needed to carry out investments, according to Sergio Vale, chief economist at MB Associados.

Monetary policy makers lifted the benchmark interest rate on October 29 by 25 basis points to 11.25%, saying the first boost since April was designed to ensure a “benign outlook” for inflation.

Consumer price increases have exceeded the ceiling of the 2.5% to 6.5% target range four times this year, easing to 6.42% mid-November.

Economists in the latest central bank survey predict the bank will raise rates again in December, to 11.50%.“Fiscal and monetary policy are going to tighten and that’s going to be another headwind for the economy,” Shearing said.