Growth of Brazil´s Travel Sector Undershoots Forecasts

Brazil´s economy grew far more slowly than expected in the first quarter, as rising interest rates soured consumer appetite and delayed investment. Gross domestic product grew by 0.3 percent against the previous quarter, according to the government statistics bureau (IBGE).

That is the worst since the third quarter of 2003 and below the consensus forecast of 0.5 per cent. Agriculture was the only sector that grew.

The poor performance is likely to strengthen criticism that the central bank tightened monetary policy screws too far by raising the prime interest rate by 375 basis points over nine months.

The central bank suggested last week that a further increase in interest rates from 19.75 percent could not be ruled out. Yet this week´s indicators showed easing inflationary pressure in May.

Economists were particularly surprised by a 0.6 percent fall in family consumption and a 3 percent decline in investment.

“The hope was a slowing economy would give industry time to expand capacity and avoid gridlocks, but with falling investments that won´t happen,” said Flavio Castelo Branco, chief economist with the industry confederation CNI in Brasilia. “The outlook is not terrible but it´s taken a turn for the worse.”