PREVIEW-Brazil’s economy cooling but still plenty warm

* Central bank likely to hold interest rates steady

* Friday Q2 GDP to show slowdown from first quarter

By Luciana Lopez

SAO PAULO, Aug 30 (BestGrowthStock) – Three months ago economists
were wringing their hands over possible overheating in Brazil’s
economy, with China-like growth provoking fears of ever-higher
interest rates to control rising consumer prices.

What a difference a quarter makes.

Since then, economic data have pointed to a sharp slowdown,
marked by a drop in industrial production and slower retail
sales growth.

The country’s finance minister, Guido Mantega, said on
Monday he expects growth of 0.5 percent to 1 percent in the
second quarter, compared to 2.7 percent in the first quarter.

And consumer prices have dropped, with the 12-month
inflation rate below the midpoint of a government target.

This week will shed light on the direction of Brazil’s
economy. On Wednesday the central bank will decide whether to
change lending costs, and on Friday the government will release
second-quarter growth figures.

Latin America’s largest economy, once a chronic
underperformer, has been among the world’s most resilient.

Brazil shook off the global economic crisis faster than
many developed economies. Brisk growth, steady job creation and
rising salaries have underscored the rising importance of major
emerging markets.

But that swift recovery made everyday consumer products
costlier — inflation sped up enough to worry Brazilians with
long memories of runaway prices in the 1980s and 90s.

The result has been higher interest rates.

The central bank started to hike its benchmark Selic rate
in April, taking it from a record low 8.75 percent to its
current 10.75 percent over three meetings. That’s among the
world’s highest rates, though still below the 13.75 percent
that Brazil had before the global crisis.
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For a graphic on Brazilian interest rates, click on:

http://link.reuters.com/pup68k

Factbox on political risks in Brazil: [ID:nRISKBR]

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PRICES DROP

Although it had looked like prices might keep rising, rough
weather that was pressuring food prices abated; clothing got
cheaper as stores marked down old wares to prepare for new
inventory; and the withdrawal of government tax breaks on cars
and appliances gave Brazilians less incentive to shop.

Tatiana Pinheiro, an economist at Banco Santander in Sao
Paulo, said the central bank has signaled that it thinks it has
some breathing room before it raises borrowing costs even
higher.

“We think the bank will hold rates steady based on their
recent signals,” she said, noting the dovish tone of the
minutes from its July meeting, when the bank raised the rate
less than economists expected.

Most economists in a Reuters poll see the bank holding the
rate at 10.75 percent this week. [ID:nSPG003024]

That’s potentially good news for Dilma Rousseff, the ruling
party presidential candidate in the October elections. Rumors
have swirled that the government has pressured the bank to keep
interest rates low to curry favor with voters.

The relatively cheap credit has been a boon to a growing
middle class, helping those Brazilians buy electronics and
designer goods that a generation ago were out of reach for all
but a few.

GDP GROWTH JUST RIGHT?

Sluggish growth in major economies abroad, including among
key trading partners, is also expected to have contributed to
slower growth in the second quarter.

Brazil’s economy grew at its fastest annual pace since 1996
in the first quarter — an unsustainable rate considering the
country’s infrastructure, bureaucracy and educational
capacity.

But some economists say the expected second-quarter
slowdown is not necessarily a bad thing. The country would do
better, they say, to settle into a sustainable pace of economic
expansion rather than stop-and-go growth spurts.

“It wasn’t normal for us to grow as quickly as we did in
the first quarter,” said Cristiano Oliveira, chief economist
for Banco Safra de Investimento in Sao Paulo. “But maybe the
slowdown in the second quarter was a little abrupt.”

Still, he said, Brazil will likely settle into a more
sustainable pace in the third quarter, slower than the first
quarter but faster than the second.

That could help spur investment in Brazil, a growing
destination for global companies, including carmakers,
retailers and airlines. At the same time, higher wages and a
strong real currency have allowed more Brazilians to go on
vacations and shopping sprees abroad.

(Editing by Paul Simao)

PREVIEW-Brazil’s economy cooling but still plenty warm