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Brazil scrapes out of recession on government spending

world Updated: Nov 28, 2014 21:25 IST
Reuters
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Brazil's economy crawled out of a recession in the third quarter as public spending rose before presidential elections, suggesting growth could be short-lived as the government plans to tighten its budget.

The economy grew 0.1% in the third quarter from the previous period, resuming expansion after two consecutive quarters of contraction, government statistics agency IBGE said on Friday.

The result missed the median forecast of 0.3 percent growth in a Reuters poll of 36 analysts. Third-quarter expansion was mostly driven by a steep 1.3% increase in government spending. That stimulus is set to end as newly re-elected President Dilma Rousseff seeks to restore market confidence and avoid a credit-rating downgrade.

"Brazil is limping rather than leaping out of recession," said Neil Shearing, chief emerging markets economist at London-based firm Capital Economics. Brazil's economy has disappointed since 2011. Global demand for the country's commodities has cooled, inflation has remained stubbornly high and investor sentiment soured due to repeated, often erratic, government intervention in the private sector.

The finance ministry said Brazil has "all the conditions" to grow faster in the fourth quarter and in 2015 as investments grew for the first time in more than a year. Economists have been more pessimistic about prospects for Brazil.

In addition to the budget cuts and tax hikes under consideration by Rousseff's newly announced economic team, markets expect big infrastructure projects could be scaled back due to a police investigation at state-run oil company Petroleo Brasileiro SA . Consumer spending, which represents nearly two-thirds of the world's seventh-largest economy, failed to grow for a third straight quarter, dropping 0.3%.

"Things are going to get a little better with the new economic team, but I don't see Brazil returning to even mediocre growth of 2-3% without structural reforms that are not going to happen," said Fabio Knijnik, managing director of K2 Capital wealth fund. When compared to the third quarter of 2013, Brazil's economy shrank 0.2%. Sustained economic growth is essential to keeping public debt under control.

Although Brazil's net debt is currently lower than 40% of GDP, interest rates are among the highest in the world at 11.25%.