Brazil picks up growth pace but easing seen

Reuters/Sao Paulo

Brazil’s economy grew at its fastest in more than three years in the second quarter, breaking a long streak of weak results, but rising interest rates and other problems mean the respite will likely be short-lived.

Economists said the good performance was probably a brief rebound after President Dilma Rousseff spurred investment with a slew of stimulus measures.

Many expect little to no growth in the second half of the year.

Brazil’s gross domestic product grew 1.5% from the first quarter, statistics agency IBGE said yesterday.

Economists had forecast 0.9% growth.

The pick-up, more than doubling the pace of growth recorded in the first three months of the year, contrasts with slower second-quarter growth in emerging market peers such as India and China, while Mexico’s economy contracted.

The upbeat numbers were welcome news for the left-leaning Rousseff, who has been heavily criticised by investors for some of her economic policies and whose popularity tumbled following a wave of massive street protests in June.

“I hope this result helps restore confidence as it shows that the Brazilian economy is efficient, dynamic, and is able to grow even in adverse conditions, when growth in most countries is slowing down,” Finance Minister Guido Mantega said.

Only China outperformed Brazil in the last quarter among the world’s main economies, Mantega said.

A senior source on Rousseff’s economic team said the stronger growth “doesn’t change much” in terms of monetary policy, suggesting the central bank will probably keep raising interest rates to keep inflation expectations under control.

Yields on interest rate futures rose after the data as traders bet on a longer monetary tightening cycle.

The real strengthened nearly 1% initially, but reversed gains later.

With Brazil’s economy stuck in low gear since Rousseff took office in 2011, her government offered tens of billions of dollars in stimulus measures such as tax breaks, subsidised credit lines and erected barriers to cheap manufactured imports.

The central bank also kept interest rates at record lows for nearly a year until starting a tightening cycle in April which has brought benchmark credit costs to their current 9%.

Investments, as measured by gross capital expenditure, rose for a third straight quarter, gaining 3.6% from the previous one.

Industrial output expanded 2%, and agriculture 3.9% - one of the most positive surprises.

While the stimulus measures helped support manufacturers and local exporters, many of the steps taken by Rousseff have also fueled inflation and hurt Brazil’s public accounts, leaving limited capacity to sustain economic growth for a long time without broader reforms, economists say.

“It was better than we expected, but the positive surprise was concentrated in the agricultural sector. It doesn’t change the outlook for the economy,” said Gustavo Mendonca, an economist at Saga Capital in Rio de Janeiro.