Brazil's economy slowed in the second quarter on weakening in the agricultural and industrial sectors, possibly signalling a sharper slowdown in coming months as its boom fades. But Latin America's largest economy kept growing strongly in some sectors, raising doubts among economists that the central bank's surprise move to slash interest rates this week may have been premature as inflation hovers above 7 percent.
Signs have grown that the economy has entered a sharper slowdown in recent weeks as a weaker global economy exacerbates a deceleration in Brazil after its breakneck - and unsustainable - expansion of 7.5 percent last year. The central bank shocked investors this week by slashing interest rates by 50 basis points to 12 percent, citing a "substantial deterioration" in the international outlook as the United States and Europe struggle with debt and anemic growth.
Gross domestic product in Latin America's largest economy grew 0.8 percent from the previous quarter after a 1.2 percent expansion in the first three months of the year, the statistics agency IBGE said on Friday. That was in line with the median forecast of 17 analysts in a Reuters poll.
"The number still shows an economy growing above its capacity. It's a reasonable (growth) rate," said Zeina Latif, Latin America economist with RBS Securities. But, she added, "there will be a stronger slowdown." GDP grew 3.1 percent compared with a year earlier, down from 4.2 percent in the previous quarter. Consumers, backed by record employment, continued to spend briskly.
Consumer spending, which makes up about 60 percent of the economy, rose 1.0 percent from the previous quarter, speeding up from 0.7 percent in the first three months. Slower growth may let policymakers advance two key goals - bringing down nagging inflation and further easing lofty interest rates.
But it also signals that Brazil, which has been a rare bright spot in the struggling global economy, risks falling behind fellow fast-growing emerging markets such as China and India. It could face further weakening of corporate profits and a continued slump in the Bovespa stock index that is already one of the world's weakest markets this year.
Finance Minister Guido Mantega said Brazil was likely to maintain strong economic growth despite a weaker international outlook, forecasting solid growth in both 2011 and 2012. "Brazil can sustain growth, as of next year, at around 5 percent," he said, putting this year's growth at 4 percent. Many analysts have been downgrading their forecasts and are projecting growth this year will be closer to 3 percent.
SLOWDOWN SETS IN The Bovespa index was down 2 percent in afternoon trading, tracking a 1.8 percent slump in the Dow Jones Industrial Average. Brazil's currency, the real, slipped against the dollar in line with weak foreign markets. Growth was dragged down by a 0.1 percent quarter-on-quarter slump in the country's powerful agricultural sector, a key element in its export earnings, compared with 3.0 expansion in the first quarter. Industry posted meager 0.2 percent growth compared with a more robust 2.2 percent increase in the prior three months.
Factors helping expansion included a 1.7 percent increase in investment and a 1.2 percent growth in government spending. Some analysts said they had expected a more drastic slowdown after the central bank's surprise interest rate cut, questioning whether the easing could aggravate inflation, given the resilience of consumer spending. The bank's first rate cut in two years raised suspicions in some quarters that it had caved into government pressure to prioritise growth over bringing inflation back to its target of 4.5 percent.