Brazil’s economy stagnates in Q3 after H1 contraction

Bloomberg/Rio de JaneiroBrazil’s economy probably stagnated in the third quarter following a contraction in the first half of the year as above-target inflation and the closest election in more than a generation eroded confidence.Gross domestic product, the value of all goods and services produced, rose 0.2% in the third quarter over the three previous months, according to the median forecast of 44 economists surveyed by Bloomberg. That compares with a 0.6% decline the previous quarter and a 0.2% drop in the first three months of the year. The statistics institute is scheduled to publish its GDP report today.Surging consumer prices and the widest budget deficit in a decade have slowed the pace of investments while dragging the currency to a nine-year low. After pledging in the campaign to boost growth and slow inflation in her second term, President Dilma Rousseff will appoint Joaquim Levy as finance minister as early as today, said a government official who asked to be named because the information isn’t public.“Things may get worse before they get better,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group, said by telephone. “That’s the pain you have to endure to heal the wounds of the previous policy excesses.”The real gained in the past two days on speculation Rousseff will appoint the new minister as soon as today. Levy, 53, helped reduce Brazil’s public debt and pay back the International Monetary Fund when he was Treasury secretary under former President Luiz Inacio Lula da Silva, paving the way for the nation’s first investment-grade rating.On Rousseff’s watch, 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.Growth became a central theme in the presidential election last month as opposition candidate Aecio Neves blamed government policies for pulling the nation into recession. The Ibovespa dropped 2.8% the day after Rousseff’s victory, which was the closest since at least 1945.This year’s economic expansion will slow to 0.3% from 2.5% in 2013, 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.Brazilian companies such as Gerdau, Latin America’s biggest steelmaker, are reconsidering investment plans in light of weaker growth. The Porto Alegre, Rio Grande do Sul-based company is reviewing whether to expand its mining unit after demand fell, Chief Executive Officer Andre Gerdau Johannpeter told reporters during a conference call November 5.“Investments have not shown any recovery at all, except for maybe a bit of inventory recovery,” John Welch, macro strategist at Canadian Imperial Bank of Commerce, said by phone. “They weren’t going to commit to any big projects until after the elections. And even now that the elections are over, I’m don’t know if they are going to get a lot of big projects.”The economic slowdown has done little to damp inflation, which has exceeded the ceiling of the target range of 2.5% to 6.5% four times this year. Consumer confidence as measured by the Getulio Vargas Foundation, a Brazilian research group and business school, this month fell to the lowest since 2008 as shoppers curtail purchases.The central bank responded to price pressures on October 29 by raising benchmark borrowing costs a quarter point to 11.25%, saying the first boost since April was designed to ensure a “benign outlook” for inflation. Swap rates on contracts due in January 2017 have surged 0.51 percentage point since the increase to 12.10% as traders bet the bank will continue to boost rates.Tighter monetary policy may be accompanied by reduced spending after Rousseff told reporters last week she would cut back on expenditures that don’t affect consumption or investment.“Everybody has hope that the necessary corrections will be made to the economy, with higher interest rates and cost cuts, and greater fiscal responsibility,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone. “Those measures are contractionist and restrictive in the short term. But it is the necessary sacrifice to get the economy back in shape.”