Brazilian growth shows signs of softening

Brazil’s pace of economic growth showed signs of softening in the first quarter but economists warned inflation was still a threat.

Latin America’s largest economy, which has been booming on the back of high commodity prices and strong consumer demand, grew 4.2 per cent over a year earlier, in line with analysts’ expectations.

“Since 2011 is a year in which we will have to make some adjustments, the growth rate will be slightly lower,” said Guido Mantega, finance minister. “But for the following years, I believe we can go back to a higher growth rate of around 5 per cent a year.”

Brazil’s economy grew 7.5 per cent last year compared with 2009, helped by the commodity boom as well as inflows of foreign capital and increased lending by the state development bank.

But the government this year has sought to rein in growth by constraining fiscal spending, restricting credit growth and increasing interest rates amid concerns the economy could overheat.

Inflation in Brazil was 6.51 per cent at the end of April, slightly above the government’s target of 4.5 per cent plus or minus 2 per cent, as new members of the country’s lower middle classes flocked to stores to buy appliances, cars and other goods.

“After expanding at overheating rates last year, the economy is immersed in a policy-induced moderation generated by the withdrawal of the fiscal stimulus and tighter monetary conditions,” said Alfredo Coutiño, director for Latin America at Moody’s Analytics.

The government said first-quarter GDP quickened compared with the fourth quarter of last year, rising 1.3 per cent, slightly above analysts’ forecasts of 1.2 per cent.

But annualised figures indicated that year-on-year, the economy would grow more slowly in 2011 compared with 2010.

The government said the increase in GDP during the quarter was led by resurgent agricultural and industrial sectors.

Marcelo Salomon, chief economist at Barclays in New York, said there had been real wage erosion in the opening months of the year.

But a tight labour market would lead to expectations of higher wages towards the end of the year.

The government has indicated the minimum wage will be increased by about 14.5 per cent in 2012, which would lead the central bank to remain cautious on inflation.

“With tight labour markets and probably a recomposition of real wages going forward, the demand side pressures are still there,” said Mr Salomon.

Economists predicted the central bank would still raise the benchmark Selic interest rate by about 25 basis points at its meeting next Wednesday.

They are forecasting an end of year Selic rate of around 13 per cent compared with the present level of 12 per cent.