Brazil data show signs of recovery

Posted on August 17, 2012

Brazil’s economy is showing signs of potential recovery amid indications that growth in June was the strongest in 15 months.

The central bank’s forward indicator for gross domestic product increased 0.75 per cent compared with May, which combined with stronger retail sales and job creation, suggests that official stimulus efforts are beginning to bear fruit.

    “We are beginning to see signs that the recovery has started,” said finance minister Guido Mantega, commenting on the earlier retail figures.

    The world’s second-largest emerging-market economy has slowed rapidly since 2010, when it grew at an Asia-like rate of 7.5 per cent, the fastest pace in more than two decades. This year growth is expected to register 2 per cent or less after slipping to 2.7 per cent last year as a strong currency and competition from imports led to a contraction in industrial production.

    In response, the central bank has cut rates to a record low while the government has stepped up stimulus efforts, including cutting a tax on cars that led to a surge in activity in the sector, the world’s fourth largest by sales.

    After nearly four quarters of sluggish growth, the central bank’s economic activity index, the IBC-Br, was 0.99 per cent higher year-on-year in June, beating market expectations. “Today’s reading is another piece of information that suggests that activity could be starting to recover,” wrote Barclays economist Guilherme Loureiro in an analyst note. “While part of the boost was driven by temporary effects … the recovery appears to be gaining momentum and becoming more widespread.”

    Retail sales in June also supported the indications of a budding recovery after rising 1.5 per cent compared with May, beating analysts’ expectations for a 0.3 per cent fall. “After a contraction in May, June’s retail sales figures confirmed the favourable momentum of household consumption,” Credit Suisse wrote in a report.

    The gains on the retail front will buy time for the government while it tries to inject energy into its investment programme. Economists believe that Brazil’s consumer-driven model of growth is nearing its limits and that the economy must boost investment, particularly to lift the capacity of its overburdened infrastructure.

    President Dilma Rousseff this week announced a R$133bn ($66bn) package for roads and railways in what analysts said was a welcome but challenging step in the right direction.

    In other good news for the government, July marked a break with a slowdown in job creation, with the economy creating a net 142,496 jobs. This was higher than during the same month a year earlier, marking a break with the trend in the first half, when job creation slowed 32 per cent compared with the same period in 2011.

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