Brazil growth slows to a crawl in 3rd quarter

Brazil's economy posted its slowest growth of the year in the third quarter as global uncertainties finally undermined activity in Latin America's largest economy.

Brazil's gross domestic product expanded 2.1% in the third quarter compared with the third quarter a year ago, the Brazilian Census Bureau, or IBGE, said Tuesday. That was below the 2.7% median forecast made by 14 economists polled by Dow Jones Newswires and down from year-on-year growth of 3.1% in the second quarter. But Brazil's economy failed to expand at all in the third quarter from the second quarter, remaining flat quarter-on-quarter, the IBGE said.

But recent moves to cut interest rates should ensure the slowdown is temporary, Brazilian officials say.

"In the fourth quarter, we will have a different situation," Finance Minister Guido Mantega told reporters Tuesday. "The economy will be accelerating because measures taken to slow it early in the year will have been reversed— mainly through monetary policy."

"The Brazilian economy decelerated in function of the macroprudential measures adopted by the government at the end of last year to contain credit and demand growth, as well as interest-rate increases implemented through July," said Rebeca Palis, who heads the gross domestic product survey for the Brazilian Institute of Geography and Statistics. "While the government started a cycle of interest-rate cuts in August, the reductions realized until now have not yet had an effect on the economy."

Brazil has moved quickly to counter the slowdown and offset any potential impact from troubles in Europe. While Brazil has remained resilient to external shocks in recent years, the country is not immune to the dire outlook for global growth brought about by the ongoing sovereign-debt crisis in the euro zone, where leaders have been slow to resolve the crisis.

The Brazilian Central Bank, in a move that was much criticized at the time, started a monetary easing cycle in August, when inflation was still rising well above the ceiling of the government's target range of 4.5% plus or minus two percentage points. The bank has made three consecutive interest-rate cuts in total, bringing the benchmark Selic base interest rate to 11%.

Last week, Brazil's government also unveiled a series of tax cuts and credit measures aimed at stimulating domestic demand. The moves are expected to fuel some improvement as early as the fourth quarter.

Brazil's economy is expected to end 2011 with growth of 3.1%, rising to 3.5% in 2012, according to the central bank's latest market survey released Monday. However, Mr. Mantega pegged 2011 growth at closer to 3.2%, although that was down from previous forecasts for a 3.8% expansion. The finance minister said growth next year should come in between 4% and 5%.

The third-quarter slowdown "should mark the trough in this cycle," said Brazil's Banco Itau. "We expect slightly positive growth in [the fourth quarter]."

Economists predict Brazilian consumers will lead the rebound. Record-low unemployment, higher wages and greater access to credit should work in tandem with the government's latest measures to stoke domestic demand.

"The solid fundamentals and a robust internal market constitute a difference in the Brazilian economy and suggest a favorable outlook for activity, even considering the complex international situation," central bank President Alexandre Tombini said Tuesday in a note.

In the near term, however, global jitters will likely keep growth depressed in the fourth quarter and into the first quarter of 2012, although it should still be better than in the third quarter, said Barclays Capital.

However, "with strong stimulus in the pipeline, we believe the economy should start gaining momentum as we move into [the second quarter of 2012]," Barclays said.

The firm expects Brazil's economy to grow 3.3% in 2012, but the pace of the expansion will be "all but gentle," Barclays said. "We are expecting growth to bounce back sharply next year."

(Published by WSJ - December 6, 2011)