Brazil economy shrinks in 4th qtr as crisis hits

SAO PAULO, (Reuters) – Brazil’s economy had its  worst showing in more than a decade in the last quarter of  2008, shrinking a larger-than-expected 3.6 percent as the  global financial crisis took a heavy toll on Latin America’s  biggest country.

The quarter-on-quarter result snapped a three-year run of  nonstop growth for Brazil, which until recently appeared to be  sidestepping the brunt of the financial crisis and was one of  the few remaining engines of global growth.

On an annual basis, gross domestic product expanded 1.3  percent in the fourth quarter of 2008, slowing sharply from a  year-on-year growth rate of 6.8 percent in the previous  quarter, the government’s statistics agency IBGE said.

More recent data have showed that Brazil’s economy started  2009 on an even weaker footing, prompting some analysts to  predict that the South American giant could end up this year  with zero growth.

“The fact the economy slowed so sharply in the fourth  quarter sets the stage for an even steeper slowdown in 2009,”  said Roberto Padovani, chief economist at WestLB do Brasil in  Sao Paulo. Industrial output posted its worst-ever yearly plunge in  January, sinking 17.2 percent, the IBGE said Friday.

Consumer confidence remains on shaky ground, and companies  like aircraft manufacturer Embraer <EMBR3.SA><ERJ.N> are laying  off thousands of workers to cope with plummeting demand.

The downturn has helped ease inflation as retailers slash  prices to attract customers, potentially paving the way for a  string of interest-rate cuts in the coming months to stoke the  economy.

Interest-rate futures <0#DIJ:> at the BM&F Commodities and  Futures Exchange in Sao Paulo fell sharply after the GDP  numbers were released as investors priced in the chances of  steeper rate cuts in the months ahead.

Brazil’s central bank is expected to slash its benchmark  lending rate on Wednesday by at least 100 basis points, a  Reuters poll showed last week. But following the release of  more weak indicators in the last few days, many economists are  now betting on a more aggressive rate cut.

“We thought that inflation pressures might return at the  end of the year, but now that doesn’t look likely. I now see a  cut of 150 basis points,” said Joel Bogdanski, an economist at  Banco Itau, Brazil’s largest bank.

For the whole of 2008, the economy grew 5.1 percent after  expanding 5.7 percent in 2007. That was in line with market  expectations of 5.2 percent annual growth, according to the  median estimate of 20 economists surveyed by Reuters. Growth  forecasts ranged from 3.5 percent to 5.6 percent.

GDP had been expected to shrink 2.3 percent in the fourth  quarter from the third, according to the median estimate of 17  economists in the poll. Estimates for the contraction ranged  from 3.4 percent to 1.5 percent.

On an annual basis, GDP had been expected to grow 1.8  percent in the fourth quarter, according to the median estimate  of 22 economists. Forecasts ranged from growth of 0.6 percent  to 3.1 percent.

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