Brazil data shows red-hot growth stabilizing

By Ana Nicolaci da Costa and Elzio Barreto

BRASILIA/SAO PAULO (BestGrowthStock) – Brazil’s red-hot economy is evening out after rapid growth in the first quarter, data showed on Wednesday, reinforcing the view that the central bank may refrain from more interest rate hikes.

A central bank monthly indicator on the economy showed that growth was virtually flat in June from May, while a broad measure of retail sales that includes construction materials, vehicles and motorcycles was flat for a second straight month.

The data reinforced the view that Latin America’s largest economy will expand in the second half of the year at a moderate pace.

Analysts also say the data reinforces expectations that the Brazilian central bank is close to the end of its monetary tightening cycle. Policymakers said last month the economy was settling into a new pattern of slower growth with a reduced risk of inflation.

“Because of the signs the central bank has been giving and what (the bulk) of the market is pricing in, I don’t think they will change this view,” said Bernardo Wjuniski, an analyst at Tendencias consultancy in Sao Paulo.

The data comes just a day after the Finance Ministry said the economy should revert to sustainable growth in the second half of the year after a sharp slowdown in the second quarter when tax breaks to key industries expired.

While Wjuniski agreed the economy would rebound, he did not think that growth would be so sustainable.

“It is growth led by demand, very much spearheaded by consumption as we saw today, with demand expanding faster than supply and this brings inflation pressures going forward,” he noted.

Despite a flat month-on-month comparison, the central bank indicator posted more than 8 percent growth in June from a year ago.

GRIP ON INFLATION

For now price pressures look relatively under control.

Inflation in Brazil was broadly flat in July for a second straight month.

And even though analysts in a weekly central bank survey are expecting inflation to come in above the midpoint of the official target this year at 5.2 percent, they have lowered their 2010 forecasts for five weeks running.

Despite the higher-than-expected 1 percent jump in the benchmark retail sales data in June from May, the mixed overall picture could reinforce the central bank’s stance that the economy is growing without posing risks to inflation, said Zeina Latif, senior Latin America economist at RBS in Sao Paulo.

“What we see is a softening of demand,” Latif said. “The main variable in the economy affecting the retail sector has been credit concession. There’s been a slowdown in credit and because of that I expect some good growth numbers, but at a more moderate pace.”

The central bank has raised borrowing costs by 200 basis points since April to 10.75 percent and analysts are divided as to whether there will be another rate rise in September or whether July’s hike was the end of a tightening cycle.

Brazil data shows red-hot growth stabilizing