Brazil economy slipped into recession

BRAZIL'S once-booming economy slipped into recession in the first quarter, but there are already signs of a nascent recovery.

The Brazilian economy officially entered into recession today after IBGE, the national statistics agency, reported that the economy contracted at a rate of 0.8 percent in the first quarter of 2009. Economists define a recession as a contraction lasting two or more consecutive quarters. Despite the official announcement, the contraction was more modest than many analysts predicted and a marked improvement over the 3.8 percent contraction in the last three months of 2008, leading to an appreciation of the real against most major currencies.

With this news, policymakers are likely to slow the pace of interest rates cuts, which the central bank has been making in an effort to spur lending. Consumer spending and government spending slightly expanded in the first quarter, but capital spending fell by 12.6 percent, indicating that companies are reducing investments.

According to the Brazilian government, the modest contraction is likely to boost capital investments, which officials believe will lead to positive growth in the second quarter.

Brazil Bond Yields Drop on Bets Bank to Cut Rates to Record Low

Brazil’s benchmark local-currency bonds rose for the first time in four days, pushing yields down the most in more than a week, before an expected reduction in the country’s benchmark lending rate to a record low today.

Yields have declined more than 3 percentage points this year. The central bank probably will reduce its benchmark rate 0.75 percentage point to 9.5 percent, according to the median forecast in a Bloomberg survey of 48 economists. Policy makers have cut borrowing costs three times this year, moving the Selic rate to 10.25 percent from 13.75 percent to bolster the economy.

“Borrowing rates still look high to unleash the credit forces in a robust manner,” Mauricio Rosal, Latin American economist at Raymond James & Associates in Sao Paulo, wrote in a note to clients today. He expects a 0.75 percentage point reduction today and another cut of a half percentage point at the central bank’s next policy meeting, set for July 21-22.

The yield on Brazil’s zero-coupon bonds due January 2010 fell five basis points, or 0.05 percentage point, to 9.32 percent at 5:02 p.m. New York time.

In the overnight interest-rates futures market, the yield on contracts to January 2010, the most-actively traded on the BM&F commodity and futures exchange, fell five basis points to 9.24 percent.

Gross Domestic Product

Gross domestic product fell 1.8 percent in the first quarter from a year ago, the first annual decline since 2001, a government report showed yesterday. The economy shrank less than the median estimate of a 2.8 percent contraction in a Bloomberg survey of 39 economists. GDP contracted 0.8 percent from the previous quarter, following a 3.6 percent drop in the fourth quarter.

Latin America’s largest economy probably will shrink 0.71 percent this year, the biggest annual contraction in at least a decade, according to a central bank survey of about 100 economists published yesterday. The economy will rebound in 2010, growing 3.5 percent, the central bank survey showed.

“The easing of downward pressures on growth is now expected to shift the market’s focus towards the inflation front,” Enrique Alvarez, head of Latin American fixed-income research at IDEAglobal Inc. in New York, wrote in a note to clients today.

Brazilian economists predict the central bank will reduce the main rate an additional half-percentage point, ending the year at 9 percent, according to the central bank survey.

Brazil’s real fell 0.2 percent to 1.9474 per U.S. dollar, from 1.9440 yesterday. The real has gained 19 percent in 2009, the best performer against the dollar among the 16 most-traded currencies tracked by Bloomberg.