Brazil's growth goes negative in the third quarter--can the central bank and the government head off a recession?

12/07/2011 6:51 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Want to know what an economic hard landing of the kind investors fear in China looks like?

Just take a glance at Brazil this morning where a central bank determined to slow growth to fight inflation by raising interest rates has produced a drop in GDP of 0.04% in the third quarter from over the second quarter. Brazil’s economy has grown by just 2.1% in the last twelve months. That’s quite a come down from the 7.5% growth rate in 2010

The Banco Central do Brasil, fearing exactly this kind of overshoot started cutting interest rates in August—after raising rates repeatedly in the first half of 2011. The August cut of 0.5 percentage points was the first of three that has lowered the benchmark Selic rate to 11% from 12.5%.

The moves by central bank president Alexandre Tombini might have been enough to steer Brazil’s economy around a slowdown except for the additional braking effect from the euro debt crisis. Added to the effects of a more expensive real—which made Brazilian goods more expensive on global markets—the slowdown in European growth as an effect of the euro crisis clobbered Brazil’s exports and led to a flood of cheaper goods from China in the first half of 2011. Now that the Brazilian economy itself has braked Brazilian consumers have gone into a slowdown themselves. In the quarter the services component of Brazil’s GDP fell by 1.1%.

The government of President Dilma Rousseff has suspended a tax on foreign investment, and cut taxes on appliances, food staples, and consumer credit in an effort to get the economy going. And the government continues to call for 3% growth in 2011 and acceleration to 5% growth for 2012.

That seems unlikely given the contraction in the global economy produced by the euro zone crisis.The only thing that kept the drop in third quarter GDP from being even larger was a 7.4% jump in exports and that kind of growth in that sector is unlikely with European economies slowing.

Economists have been projecting a drop in interest rates to 10% or even 9% in 2012 to jump start growth. After today’s economic report, I think 9% is more likely.

The first half of 2012 should produce the combination of lower stock prices on lower growth (although I’m not looking for a huge retreat since Brazilian stocks are already so cheap and the economic slowdown has been widely anticipated) and single digit interest rates that would make a really attractive entry point into the Brazilian market for the second half of 2012.

 

 

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