Brazil economic activity down amid inflation

Brazil’s economic activity fell in June for the first time since 2008, adding to worries Latin America’s biggest economy could slow more than was hoped for. The central bank’s IBC-Br economic activity index fell 0.26 per cent in June from May, the first sequential drop since December 2008, when the global financial crisis plunged major economies into recession.Economists have been revising down their forecasts for Brazilian economic growth this year amid both a weaker global economy and a slew of local factors, such as stubbornly high inflation rates.In a report dated on Wednesday, Morgan Stanley not only lowered its view for growth in the developed world this year, but also cut its Brazil GDP forecast to 3.7 per cent from a previous 4 per cent this year.For next year, the cut was steeper: to 3.5 per cent from 4.6 per cent. Brazil’s economy is showing strain after a 7.5 per cent surge last year, its biggest jump in 24 years.But that growth also came with rising consumer prices — the fastest year-end inflation in six years. The benchmark IPCA has advanced even more since then, above a 6.5 per cent government ceiling since April.The central bank has now raised interest rates five times - in every single meeting under bank President Alexandre Tombini, who took office in January - to lift them to 12.5 per cent from 10.75 per cent this year. But price increases remain sticky, boosted in part by rising salaries amid a tight labor market.Policymakers face a difficult trade-off: Higher interest rates might rein in those worrisome inflation rates but could also slow economic growth. But not braking inflation would also eat into real gains.And the lower-income voters who helped propel Dilma Rousseff into the country’s presidency last year are keeping a close eye on inflation, interest rates and what economic gains they can expect in her fledgling administration.Sagging industrial output and retail sales data in recent weeks have fanned worries the economy might be losing steam faster than initially expected. “The bottom line is that the economy likely slowed much more than we anticipated in the second quarter,” Goldman Sachs economist Paulo Leme told clients in a note. “The initial conditions for activity are worse even before we consider the risk of contraction shocks coming from abroad.”The bank also revised down growth in May from April to 0.05 per cent from a previously reported 0.17 per cent.According to Barclays Capital economist Marcelo Salomon, the central bank’s revisions shaved nearly one-third of a per centage point off growth in the January-May 2011 period.Leme said the data, coupled with concerns about a global economic slowdown, increased odds the central bank would hold its benchmark lending rate on Aug.31 rather than raise interest rates as Goldman Sachs previously forecast. The central bank has raised interest rates five times this year to 12.5 per cent to try to rein inflation as it rose to its fastest pace in six years.Yields on Brazilian interest rate futures contracts sank in on Wednesday trade on concerns activity could be slowing at a faster pace than expected. Investors usually push rates lower when they expect economic activity to slow. The yield on the rate contract due January 2013, among the most highly traded early in the session, slumped to 11.75 per cent from 11.86 per cent in the previous session. Boosting Brazil’s ethanol output has been singled out for $1.9 billion of that total. The government and the company have been concerned over the failure of the cane sector to meet growing domestic demand for the fuel.Bad weather and lack of investment in crop rotation to keep yields up and in expansion over the past years since the global financial crisis has caused Brazil’s cane output to fall for the first time in a decade this season. Consequently, ethanol production has not kept pace with local demand from the growing fleet of flex-fuel cars in Brazil. Motorists have been switching increasingly to gasoline due to high ethanol prices.This has left scrambling to buy gasoline on international markets at a financial loss due to the government cap on local fuel prices. From / Gulf Today