UPDATE 3-Brazil GDP growth eases in Q1 as investment slows

Tue Jun 10, 2008 4:37pm EDT
(Adds president, finance minister comments)
By Elzio Barreto
SAO PAULO, June 10 (Reuters) - Brazil's economy slowed in the first quarter as companies reduced investments after spending at a torrid pace on new machinery and factories, the government said on Tuesday.
Gross domestic product growth slowed to 0.7 percent in the first quarter from the 1.6 percent expansion seen in the fourth quarter, data from Brazil's statistics agency IBGE showed.
Year-over-year growth slowed to 5.8 percent in the first quarter of 2007 from the 6.2 percent annual pace in the preceding quarter. Finance Minister Guido Mantega called the slowdown "desirable" because the economy's strong expansion last year had threatened to stoke inflation.
"We are not suppressing demand, it's only a slight deceleration, it's throwing a bit of cold water on the fire," Mantega told reporters.
The economy is expected to lose steam in the coming months as recent interest rate rises prompt consumers to pare spending and companies to cut investments, analysts said.
Brazil's central bank raised its benchmark lending rate last week for the second time in less than two months to curb resurgent inflation and prevent the economy from overheating.
"The economy is set to slow under monetary tightening," said Marcelo Carvalho, chief Brazil economist for Morgan Stanley in Sao Paulo. "This year started strong, but it will probably end on a soft note."
Carvalho expects Brazil's GDP growth will slow to between 3 and 4 percent annually in the second half of 2008 from a 5 to 6 percent pace now.
A Reuters poll forecast first-quarter GDP would grow 0.8 percent from the fourth quarter of 2007 and 5.6 percent from the first quarter of 2007.
Brazil's economy, the largest in Latin America, is forecast to expand 4.8 percent in 2008, after surging 5.4 percent in 2007, according to central bank estimates.
"I am convinced that we will stay with this (growth) for many, many years," President Luiz Inacio Lula da Silva said. "It's just a matter of us not losing common sense and not allowing inflation to come back."
Brazil's benchmark inflation index jumped 5.25 percent in the 12 months to mid-May, much higher than the 4.5 percent target the central bank has for 2008 and 2009.
INTEREST RATE FUTURES
Interest rate futures rose after the release of the GDP data.
The contract <0#dij:> for January 2010 delivery, the most widely traded on the BM&F commodities and futures exchange, rose to 14.81 percent from Monday's close of 14.76 percent.
The contract indicates investors' expectations for the benchmark Selic rate at the end of December 2009.
Brazil's industry grew 1.6 percent quarter on quarter, accelerating from a 1.1 percent rate of expansion in the fourth quarter. It grew 6.9 percent from the first quarter of 2007.
Services growth slowed to 1 percent from 1.5 percent in the previous quarter and jumped 5 percent year on year.
Capital investments in areas such as machinery, factories and infrastructure grew 1.3 percent quarter on quarter after expanding 3.3 percent in the fourth quarter.
Investments jumped 15.2 percent from the first quarter of 2007 as companies ramped up capacity to keep up with surging domestic demand, although at a slower pace than the 16 percent rate seen in the fourth quarter.
"Historically, this is one of the most volatile components," Carvalho said. "Whenever the economy is booming, investment grows the fastest; when the economy goes into a slump, investment is the one that takes the most heat."
For the complete GDP report please go to: here (Additional reporting by Isabel Versiani in Brasilia, Carmen Munari in Sao Paulo and Rodrigo Viga Gaier in Rio de Janeiro; Editing by James Dalgleish)