SAO PAULO (Reuters) - Brazil’s economy grew at its fastest pace in 24 years in 2010, gaining steam at the end of the year on buoyant consumer demand while industry struggled to cope with a strong currency.
Last year’s 7.5 percent expansion, not far behind growth rates in China and India, is likely as good as it gets for Latin America’s largest economy for some time as higher interest rates and tighter public spending cool domestic demand and slow growth to a more sustainable pace in 2011.
The rapid growth, driven by record-low unemployment and a confident new middle class of free-spending consumers, crowned the presidency of Luiz Inacio Lula da Silva, who bowed out last year with an approval rating just shy of 90 percent.
But the tax breaks and loose spending that helped boost the economy left a fiscal mess for Lula’s hand-picked successor, Dilma Rousseff, now grappling with inflation above 6 percent.
“We’re cutting the budget now because, for us, controlling inflation is one of the most important matters,” Rousseff told reporters in Brasilia on Thursday.
“The 7.5 rate deserves our praise, but we’re always going to be looking for a reasonable growth rate, 4.5 to 5 percent, which is sustainable and permanent,” she said.
That’s about the growth rate that Brazil will see this year, according to Finance Minister Guido Mantega, who said still robust domestic demand and investment would continue to drive the economy in 2011.
The full-year expansion compares with 10.3 percent growth in China last year and expected growth of around 8 percent in India, highlighting the strength of emerging economies compared to their still-struggling European and U.S. counterparts.
But Brazil’s maddening bureaucracy, complex tax code and severe infrastructure woes make such a clip unsustainable.
The economy, which rebounded from a 0.6 percent contraction in 2009, grew 5.0 percent in the fourth quarter of 2010 from the same period a year earlier, in line with expectations.
Household consumption, which has been a main pillar of Brazil’s economic boom in recent years, rose a brisk 2.5 percent in the fourth quarter from the previous three months as Brazilians continued to brandish their wallets.
Armed with credit cards and rising wages, new members of the middle class are buying cars in record numbers and taking their first-ever foreign vacations. Restaurant seating in Sao Paulo, the country’s largest city, often spills over onto sidewalks as families skip eating at home.
But industrial output dropped 0.3 percent, highlighting the burden of a strong currency on business, while agriculture in a global breadbasket slipped 0.8 percent.
“The bigger concern is that it’s a two-speed growth story: consumers remained the key driver of growth and exporters are lagging behind in this recovery,” said Neil Shearing, an economist at Capital Economics in London.
Some analysts call this year’s growth estimates too rosy, given about $30 billion in pledged public spending cuts, higher interest rates and tighter bank reserve requirements.
“Growth last year was mostly concentrated in the first quarter, with a strong carry-over,” said Mauricio Rosal, Latin American economist at Raymond James in Sao Paulo.
“Growth will be a lot lower this year, maybe half of what we saw last year,” he added.
Rousseff has pledged to cut spending heavily to ease demand pressures in the world’s 8th biggest economy. Meanwhile, the central bank hiked interest rates for the second time in three months on Wednesday, raising the benchmark rate to 11.75 percent from 11.25 percent.
Economists expect more rate hikes given that annual inflation, at 6.08 percent, is running above the government target of 4.5 percent, plus or minus 2 percentage points.
Benchmark inflation data on Friday will likely confirm that outlook. The 0.85 percent median forecast in a Reuters poll would be the biggest calendar-month jump since April 2005.
Yields on longer-dated interest rate futures contracts rose on Thursday as investors priced in higher borrowing costs in coming years.
The economy expanded 0.7 percent in the fourth quarter when compared to the previous quarter, falling just short of the 0.9 percent median forecast of 20 analysts polled by Reuters.
Capital spending, a gauge of investment, rose 0.7 percent on a quarter-on-quarter basis and a whopping 21.8 percent for all of 2010. The central bank said that figure indicates that businesses are confident in Brazil’s economic outlook in the coming years.
Additional reporting by Rodrigo Viga Gaier in Rio de Janeiro and Jeferson Ribeiro in Brasilia; Writing by Stuart Grudgings; Editing by Todd Benson and Diane Craft