UPDATE 4-Brazil's economy shrinks for first time since 2009

Tue Dec 3, 2013 1:57pm EST

By Brad Haynes and Silvio Cascione
    SAO PAULO, Dec 3 (Reuters) - Brazil's economy contracted in
the third quarter for the first time since early 2009 as a steep
drop in investment showed flagging confidence in what was
recently one of the world's most attractive emerging markets.
    The economy shrank 0.5 percent between July and September
from the prior three months, government statistics agency IBGE
said on Tuesday, missing forecasts in what has become a
disappointing routine over the last three years. Gross domestic
product had been expected to drop 0.2 percent, according to the
median forecast of 40 economists polled by Reuters.
    The weak quarter reinforced a dimming economic outlook for
Brazil, which has struggled to contain inflation and stay
competitive in recent years, tarnishing the reputation earned
with a decade of robust growth.
    A full-blown recession remains unlikely in Latin America's
largest economy, but the slowdown increases the odds of weak
growth and a possible credit rating downgrade next year, when
President Dilma Rousseff is expected to seek re-election.
    So far the country's sturdy job market has insulated most
Brazilians - as well as Rousseff's popularity - from the
sluggish economy. But consumer prices have climbed faster than
wages for most of the past year, sapping shoppers' appetites.
    Glancing at the bustling bars of Rio or the packed streets
of Sao Paulo you might not notice, but beer consumption and new
car sales are falling this year for the first time in a decade.
    
    Brazil's toughest month this year seems to have been July,
following widespread protests against poor public services. The
rebound since then has been fragile and economists are slashing
forecasts for 2013 and 2014, which looks to be even weaker.
    "The fourth quarter started weak and growth (this year)
should be closer to 2.2 or 2.3 percent than the 2.5 percent we
had before," said Flavio Serrano, an economist at Espirito Santo
Investment Bank. "We were not able to grow despite various
economic stimulus measures ... due to a macroeconomic imbalance
with little production and a lot of consumption."
    The stagnation in Brazil contrasts with major
emerging-market peers such as Mexico, India and China, where
economic growth recovered between July and September after
disappointing in the first half of the year.
    Brazil is out of step due largely to heavy government
stimulus over the past year that is starting to lose steam.
    The tax breaks and cheap loans unleashed by Rousseff have
yielded meager results, and their withdrawal is now clouding the
outlook for carmakers and furniture factories.
    Public spending grew 1.2 percent in the third quarter, the
economy's strongest driver of new demand, but officials have
warned there is no room for more stimulus as tax revenues dry up
and the government misses budget targets.
    
    TOUGH YEAR AHEAD
    That leaves Rousseff without much fiscal firepower at the
end of her first term. Next year promises to be a handful for
the president, as she juggles preparations for hosting the World
Cup, skepticism from business leaders and a likely withdrawal of
monetary stimulus in the United States.
    Evaporating growth - combined with new evidence of
stagnation from January to March - reinforced expectations that
Brazil's central bank could soon wrap up a cycle of interest
rate hikes aimed at cooling inflation. Yields on interest rate
futures fell on Tuesday as traders bet increasingly on a single,
smaller rate hike in January. 
    Brazil's currency slipped to its weakest level since
early September and stocks in Sao Paulo fell to a
three-month low as the disappointing data turned off investors.
    Finance Minister Guido Mantega blamed the letdown on weak
global growth and tighter consumer lending from Brazilian banks,
telling reporters on Tuesday he saw the economy on a "gradual
growth trend." 
    The day before, Mantega forecast average growth of 4 percent
per year over the next decade - a rate Brazil has not managed
once under Rousseff - feeding criticism that the government is
out of touch with investors' concerns.
     Brazil's economic expansion capped a booming decade with
7.5 percent growth in 2010, the year Rousseff was elected. The
economy has slowed sharply since she took office, with growth of
only 1 percent last year.
    The private sector remains wary of picking up the slack.
    Investment fell by 2.2 percent from the second quarter, as
stifling costs and sour business sentiment discouraged capital
spending. Raw material exporters such as iron miner Vale SA
 have also cut investment plans in the face of lower
global commodity prices. 
    The biggest drop in output last quarter came from the farm
sector, which shrank 3.5 percent after a major harvest ended,
giving back some of the gains of a strong second quarter. 
    Other markets remain buoyant in the face of skeptics. Home
prices in major cities have jumped over 70 percent since 2010,
adding to some families' sense of struggling to keep up.
    The sharp depreciation of the Brazilian currency this year
has also driven up the cost of imports, which were already
staggeringly expensive in many cases.
    The Playstation 4 costs $400 in the United States but
retails for 4,000 reais ($1,700) in Brazil. High taxes and steep
tariffs also stand in the way of importing more productive
machinery that would boost competitiveness.
    Brazilian factories have struggled to compete with foreign
manufacturers, and more assembly lines went idle as tax breaks
for many sectors began to expire in the third quarter. The
industrial contribution to GDP was just 0.1 percent.
    But even the services sector, which faces less foreign
competition, expanded only 0.1 percent in the quarter.
    As services play an increasingly important role in Brazil's
economy, IBGE has modified its methods for calculating growth,
leading to a revision of data from recent years.
    Brazil expanded 1.8 percent in the second quarter and
remained flat in the first quarter of 2013, IBGE said on
Tuesday, compared to previously reported growth rates of 1.5 and
0.6 percent respectively.
    The third quarter of 2011, which had previously been
registered as a 0.1 percent contraction, was revised up to
reflect zero growth in the period.
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