Brazil economy disappoints again in Q1

SAO PAULO (Reuters): Brazil’s economy barely expanded in the first quarter a s frustrated business leaders cut back on investments, setting the stage for another disappointing year and casting new doubt on the health of emerging markets.

The economy grew just 0.2 percent compared to the final three months of 2011, less than half t he pace markets expected. The third straight quarter of weakness in the world’s sixth-largest economy prompted new calls for President Dilma Rousseff to enact much bolder reforms that could reclaim Brazil’s mantle as a favorite of global investors.

That reputation has faded since mid-2011 as Brazil failed to cope adequately with the challenges posed by its boom over the past decade. A combination of a clogged transport system, an overvalued currency and an expensive and under qualified labor force has raised the costs of doing business and caused companies to delay or cancel expansion plans.

The data released by the government on Friday showed that, despite numerous stimulus packages enacted by Rousseff since late last year, investment shrank in the first quarter. Some business leaders say that much more dramatic steps - such as an across-the-board simplification of Brazil’s byzantine tax code – are necessary to unlock a new era of fast growth.

“Brazil is not going to grow unless we make the necessary reforms,” said Sussumu Honda, president of the Brazilian Association of Supermarkets. “The country is not competitive. It’s not just a question of this year.”

The worst-performing sector in the first quarter was agriculture, which has been damaged by a severe drought in southern Brazil. While industry did better than some expected, separate and more up-to-date data released on Fri day suggested a meaningful recovery in that sector also remains far off.

Taken together, the data seem likely to spark more interest rate cuts by Brazil’s central bank and cause another wave of downward revisions to the economic outlook. Economists had already expected growth of just under 3 percent this year - in line with growth of 2.7 percent in 2011, and a far cry from the booming 7.5 percent expansion in 2010.

“These are signs that, really, GDP (this year) may end up below what people are expecting, what the government’s expecting,” said Rodrigo Melo, chief economist at Maua Sekular, an asset management firm in Sao Paulo.

Several other big emerging markets are also sputtering, threatening to deprive the global economy of one of its only sources of fast growth. India reported its slowest quarterly pace of growth in nine years on Thursday, while South Africa may also struggle to reach 3 percent growth this year.

Payroll data released in the United States on Friday also added to pessimism about the global economy.

The darker economic outlook at home and abroad caused Brazil’s real to weaken almost 1 percent against the dollar by midday. Brazil’s stock market fell more than 2.5 percent before recovering to trade down about 1 percent.

Interest rate futures also fell sharply as investors bet the central bank would continue an easing cycle that has already caused the benchmark Selic rate to fall 4 percentage points since last August, including a 50 basis-point cut announced on Wednesday.

Brazil’s problems are to some extent a reflection of problems abroad, including a slowdown in China, its biggest trading partner, and a loss of confidence in the euro zone. Rousseff has blamed a monetary “tsunami” of cheap money in Europe and the United States for making Brazil’s currency over-valued and causing its exports to become less competitive.

Yet other Latin American countries have generally held up better, with the International Monetary Fund forecasting the region as a whole will grow 3.7 percent this year. That suggests that more local factors are playing a big role in Brazil’s woes.