UPDATE 4-Brazil economy shrinks at fastest rate since 1996

Tue Mar 10, 2009 4:10pm EDT
By Todd Benson
SAO PAULO, March 10 (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 from the previous quarter as the global financial crisis took a heavy toll on Latin America's biggest country.
The result snapped a three-year run of nonstop growth for Brazil, which until recently appeared to be sidestepping the brunt of the crisis and was one of the few remaining engines of global growth as major economies in Europe, the United States and Asia sputtered.
The weak numbers, released on the same day that the International Monetary Fund warned that the world economy was headed for a "Great Recession," also bolstered the view that Brazil's central bank will need to aggressively cut interest rates to prevent a prolonged downturn.
On an annual basis, gross domestic product expanded just 1.3 percent in the fourth quarter from a year earlier, slowing sharply from a blistering growth rate of 6.8 percent in the third quarter, the government's statistics agency IBGE said.
More recent data has shown 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.
Industrial output posted its worst-ever yearly plunge in January, sinking 17.2 percent, the IBGE said Friday. Consumer confidence hit an all-time low in February, and companies like aircraft manufacturer Embraer (EMBR3.SA)(ERJ.N) are laying off thousands of workers to cope with plummeting demand.
On the flip side, the downturn has helped ease inflation as retailers slash prices to attract customers, potentially paving the way for a string of interest-rate cuts.
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.
Most analysts were expecting Brazil's central bank to slash its benchmark lending rate by 100 basis points on Wednesday. But the consensus changed after the release of the GDP data, which showed the largest quarterly contraction since 1996.
Of 20 economists surveyed by Reuters on Tuesday, 16 predicted the bank will now cut rates by 150 basis points. [ID:nSAQ000262]
"The chances of a more aggressive rate cut increased significantly," said Jankiel Santos, chief economist at BES Investimento in Sao Paulo.