Stuck in Recession Brazil Creates Its Own Stimulus Package

Brazilian factory Following the news that Brazil's Gross Domestic Product (GDP) dropped 0.8% in the first quarter of this year as against the last three quarters of last year, expectation of the government of Brazil and of the market is that in the period from April to June this year the results should be better.

"We believe that the second quarter should generate a positive result when compared to the previous quarter, but maybe not yet when compared to the second quarter of 2008," said the minister of Planning, Paulo Bernardo. With regard to the same period last year, the GDP reduction was 1.8%.

The government promised, through Finance minister Guido Mantega, new measures to stimulate the economy of Brazil. Measures that have already been adopted are the reduction of the Industrialized Product Tax (IPI), but according to the finance minister, Brazilian president Luiz Inácio Lula da Silva signed June 9 a provisory measure regulating the Credit Guarantee Fund for Small and Medium Companies.

The Brazilian Development Bank (BNDES), according to him, is already preparing the rules to make this credit available.

Brazilian Central Bank's Monetary Policy Committee (Copom) in a surprise move this Wednesday, June 10, cut by 1% its key interest rate, the Selic. The decision, which was taken by a divided committee, means that the Selic has fallen from 10.25% to 9.25%.

This was the fourth consecutive cut. In April, Brazil had already lowered its rates by one full percentage.  The March reduction had been even bigger: 1.5%. With the last cut Brazil gets its lowest interest rate ever and for the first time the Selic is under two digits.

"The president was calm, he was already expecting a negative result, but there were also elements showing that the economy is improving," said minister Paulo Bernardo, after a meeting with Lula. According to him, the president wants to maintain measures for credit stimulation.

Mantega hopes for growth of 1% in the GDP of Brazil this year and recalls that the recovery of the economy is gradual. "As the fall was great last year, recovery is slow. It appears little by little, there should not be great growth in the second and third quarter.

We are talking about gradual recovery," said the minister. Mantega recalled that the problems faced by the ironworks sector, due to the international crisis, influenced the performance of the economy in the third quarter, but companies in the sector should return to producing more in coming months.

The 0.8% reduction, disclosed by the Brazilian Institute for Geography and Statistics (IBGE), was lower than that expected by the government and market. The government expected a reduction of 1.5%. The market bet on a greater reduction, 2.5%.

Over the same period last year, the government believed the reduction would be 2.4% and the market 3.4%. The greatest reduction, in the first quarter of this year, was in the industrial sector, which fell 3.1%. In agriculture, the reduction was 0.5% and in the service sector there was expansion of 0.8%.

There was also great reduction in the gross formation of fixed capital, which shows the level of investment from January to March when compared to the period from October to December last year. It dropped 12.6%, the greatest reduction since it started being recorded, in 1996. Over the first quarter of last year, the reduction in investment was 14%.

ABr

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