Economic Institute Joins the Bears: Brazil to Grow a Mere 2.3%

Brazil’s Institute of Applied Economic Research, IPEA, downgraded the country’s economic growth forecasts both in 2005 and 2006. The quarterly report forecasts Brazil will expand 2.3% instead of 3.5% as previously announced, and 3.4% in 2006, down from 4%.

The latest forecast has been interpreted as a quick reply to a similar bearish outlook earlier in the week from Brazil’s main business organization, CNI, National Industry Confederation.

IPEA attributed the slowdown to companies’ sharply cutting back on planned purchases of plant and equipment in response to Brazil’s "political crisis."

"We have had since the second half of June, a scenario of enormous uncertainty, with several scandals, rumors of the president’s removal as a consequence of the Congressional situation and none of this favors investment decisions," IPEA’s director Paulo Levy told reporters.

The CNI report released Tuesday, December 6, slashed this year’s IPEA original investment growth estimate from 5.3 to 0.9%.

Brazil’s government predicted last January that GDP would increase by 3.4% this year, a slower pace compared to the 4.9% of 2004 and the best of the last decade.

The "frustrating" slump in the third quarter and the rising value of the Brazilian real – hurting exports – reinforce the need for "a lowering interest rates course throughout 2006" emphasized Mr. Levy in the IPEA.

Brazilian industry and business community have long complained about interest rates, which are the highest in the world when adjusted for inflation. Following a recent cut, the benchmark rate is 18.5%, with rates on consumer loans spiraling as high as 150%.

The Brazilian Central Bank, backed by Finance Minister Antonio Palocci, insists high rates are necessary to ward off inflation, a historic scourge that Brazil only managed to tame within the last decade.

The "political crisis" quoted in the IPEA report refers to allegations that President Luiz Inácio Lula da Silva’s Workers Party was bribing legislators to support the administration’s bills in Congress.

A number of high-ranking party figures, including presidential chief of staff José Dirceu, have since been forced to step down.

CNI economists estimate GDP growth this year in 2.5%, and warned that the 20% appreciation of the local currency real against the US dollar is making Brazilian exporters far less competitive, which will have consequences during 2006.

This article appeared originally in Mercopress – www.mercopress.com.

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