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Brazil grew a paltry 0.6 percent in third quarter

Yana Marull
A Brazilian aircraft Embraer 175 is seen at the airport next to Embraer's factory in Sao Jose dos Campos, about 100 km east from Sao Paulo, Brazil, on October 17. The Brazilian economy expanded a paltry 0.6 percent in the third quarter of 2012 compared with the previous three months, signaling a weaker than anticipated recovery, the Brazilian statistics office said Friday.

Brazil's economy grew just 0.6 percent in the third quarter of 2012 compared with the previous three months, signaling a weaker than anticipated recovery, the Brazilian statistics office said Friday.

The Institute of Geography and Statistics (IBGE) said the economy rose 0.9 percent in the July-to-September quarter compared with the same period of last year, and a mere 0.7 percent so far this year.

"This third-quarter result signals an improvement. We are on a trajectory of economic recovery, growth," Finance Minister Guido Mantega told a press conference in Sao Paulo.

"It was not as strong as we and analysts had expected, but the economy is in an acceleration phase," he added. "We are on the right course and with this we should achieve four percent growth in 2013."

But Paulo Skaf, president of the powerful Sao Paulo Federation of Industries (FIESP) voiced strong skepticism.

"If we don't have conditions for investment, we will have difficulties next year to grow more than three percent," he said.

Market analysts and the government had expected GDP growth of one percent in the third quarter, but the modest third-quarter rise in the world's sixth largest economy was still the strongest this year.

The economy expanded 0.1 percent in the first quarter and 0.2 percent in the second compared with the previous ones, according to the latest revised figures.

"The result of the third quarter is not the one percent that we anticipated. And it will drag the annual result down. We now expect GDP growth for 2012 to stand closer to one percent," said Silvia Matos, an economist at the Getulio Vargas Foundation.

The market is banking on 1.5 percent growth this year, a projection similar to one by the International Monetary Fund (IMF) in October.

The IMF also expects Brazil to fare worse than its partners in the BRICS bloc of emerging powers, predicting 7.8 percent growth for China, 4.9 percent for India, 3.7 percent for Russia and 2.6 percent for South Africa.

The food sector surged 2.5 percent in the third quarter while the industrial sector grew 1.1 percent. The service sector remained flat.

Mantega noted that the recovery was taking place mainly "in those sectors which were a source of concern to us: industry and agribusiness."

The national economy lost steam last year due to the global slowdown, with GDP growth at 2.7 percent, down from a sizzling 7.5 percent in 2010.

The timid growth results from recent government incentives to boost industry and consumption and follows a year of steady cuts in the central bank's key interest rate, now down to a record low of 7.5 percent.

The central bank launched its rate cut strategy in August 2011, when the interest rate stood at a historic high of 12.5 percent and inflation, at 7.2 percent, exceeded the government's target.

"Industry reacted positively to these (stimulus) measures," Mantega said, adding that the government would next week unveil new measures to spur investment.

Yet FIESP warned that Brazil's high production costs are hampering private investment.

"We have a record tax burden, high credit cost, excessive red tape and electricity rates that are among the highest in the world," it complained.

Analyst Roberto Troster, a former chief economist at the Federation of Brazilian Banks, said the government must "change its economic policy, focus less on demand and consumption and more on supply, promoting the structural reforms and the productivity that the country requires."

He warned that failure to revive the economy could jeopardize President Dilma Rousseff's chances of reelection in 2014.

Meanwhile, Alexandre Tombini, the president of the Central Bank, hailed the effectiveness of the government's stimulus measures.

"Signs point to an intensification of the pace of economic activity next year," he said.

But market analysts appear to be mainly concerned about inflation.

"We continue to believe that inflation is the main issue... It will exceed 6.5 percent next year," Marcelo Carvalho, chief economist of Paribas for Latin America, warned Wednesday adding that authorities then would have to order new rate hikes.

Experts expect inflation to reach 5.4 percent this year, above the official target of 4.5 percent.

Last year, consumer prices rose 6.5 percent, their highest level in seven years.