Brazil Fears Inflation While GDP Grows 5.8%

In a Brazilian supermarket The Gross Domestic Product (GDP) of Brazil expanded 5.8% in the first quarter compared to the same period a year ago, and 0.7% over the previous quarter, according to the latest release from the IBGE (Brazilian Institute of Geography and Statistics).

Higher consumer spending boosted growth, which was in line with private forecasts. In the last 12 months to March GDP expanded 5.85% and household consumption rose 6.6% in the first quarter from a year ago.

Domestic demand, fueled by credit, public spending and rising incomes, is helping Latin America's biggest economy offset declining exports.

IBGE data shows manufacturing increased 1.6%, services 1% while agriculture suffered a 3.5% contraction during the quarter.

The Brazilian Central Bank which in the last eight years has been known for its orthodox approach in combating inflation is expected to raise the benchmark interest rate to 14% by the end of the year from the current 12.25%. Inflation in April/May reached a two year high.

Government spending jumped 5.8% in the first quarter from a year earlier, while exports fell 2.14% from a year ago, their first quarterly decline since June 2006.

Private analysts estimate the Brazilian economy will peak in the second quarter somewhere in the range of 6.2% before moderating towards 5.4% at the end of 2008.

Finance Minister Guido Mantega said it was "desirable" for growth to slow from the previous quarter to ease concern about demand outpacing supply and fueling inflation.

"We now have a greater convergence between demand, the consumption of families and society, and supply," Mantega told reporters in Brasilia.

The Central Bank raised the basic Selic rate twice by half a percentage point in April and June to 12.25% from 11.25%. Inflation has been above the 4.5% target since January and the April increase was the first in almost three years.

The services industry, which accounts for about 60% of the Brazilian economy, expanded 5% from a year earlier. Manufacturing rose 6.9% and agriculture, which accounts for less than 10% of GDP, grew 2.4%.

Brazil's local currency, the real, gained 19% in the past 12 months against the US dollar, one of the best performance among the world's leading economies. The strong appreciation of the Brazilian currency is also helping to mitigate the impact of record oil prices on the Brazilian economy.

Mercopress

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