Brazil’s boom slowing to ‘sustainable pace’

Brazil’s economy kept booming at a potentially dangerous pace in the first quarter, data showed Friday, although signs of slower growth in recent months should ease worries about overheating.

Gross domestic product grew 1.3 per cent in the first quarter compared to the previous quarter, statistics agency IBGE said. That was just above most forecasts, and yielded a growth rate of 4.2 per cent compared to the year before.

Brazil’s robust growth has lifted millions out of poverty and made the country an investor favourite at a time when most of the rest of the global economy continues to struggle. Yet the unabated expansion has also brought problems, including inflation near six-year highs, an overvalued exchange rate, and growing concerns about asset bubbles in some sectors.

The central bank has already raised interest rates by 1.25 percentage points this year to slow growth and is expected to do so again next week, though signs that demand is beginning to cool should limit the upcoming rate rise to a quarter percentage point, according to forecasts.

Brazil has “all the conditions to keep growing at a sustainable pace,” Central Bank president Alexandre Tombini told business leaders Friday after the data was released, adding that officials are committed to keeping inflation low.

Growth in the first quarter was bolstered by investment, which rose 1.2 per cent on a quarterly basis, in a clear sign of confidence that Brazil will keep prospering as it prepares to host the 2014 FIFA World Cup and 2016 Olympics.

Brazilian industry also performed surprisingly well despite coping with a strong local currency, growing 2.2 per cent compared to the fourth quarter.

Yet household consumption showed signs of responding to tighter credit, expanding at a 0.6-per-cent quarterly pace – dramatically slower than the expansion rates seen last year, the IBGE said.

Other recent signs that Brazil’s economy is slowing include a surprisingly sharp decline in industrial production in April; flat domestic auto sales; slower credit growth; and indications of a broad slowdown in China, Brazil’s biggest foreign investor and the main market for its commodities exports.

“We’ve seen a slowdown after the first quarter, which surprised on the upside,” said Newton Rosa, the chief economist with SulAmerica Investimentos. He said the economy has “begun to feel the effect of the government’s tightening measures.”

Latin America’s biggest economy had been expected to expand 1.2 per cent on a quarter-on-quarter basis, according to the median forecast of 20 analysts polled by Reuters.

The economy expanded a revised 0.8 per cent in the fourth quarter from the third.

“The economy is good now,” said Benjamin Mario Baptista Filho, chief executive officer of steelmaker ArcelorMittal Brasil. “It was overheating, and Brazil isn’t in a position to grow 3-4 per cent every year because we don’t have the logistical infrastructure.”

Brazil’s economy grew a sizzling 7.5 per cent last year, its fastest clip in 24 years. While that expansion put Brazil among powerhouse emerging markets such as India and China, economists warned the pace was unsustainable. Analysts expect growth to slow to around 4 per cent this year.

Twelve-month inflation through April reached 6.51 per cent, just above the central bank target of 4.5 per cent, plus or minus 2 percentage points.

The rise in consumer prices threatens to overshadow President Dilma Rousseff’s first year in office, potentially denting her popularity among her working-class base and weakening her political clout to pass key economic reforms.

The central bank has raised interest rates three times so far this year to 12 per cent, and analysts in a Reuters poll see another hike to 12.25 per cent next Wednesday.