Sao Paulo - Brazil's economy contracted in the third quarter for the first time since early 2009, falling short of expectations yet again as plunging investment and idle factories wiped out what had already been sluggish growth.
The economy shrank 0.5 percent between July and September from the prior three months, government statistics agency IBGE said on Tuesday, missing forecasts in what has become a disappointing routine over the last three years.
Gross domestic product had been expected to drop 0.2 percent, according to the median forecast of 40 economists polled by Reuters.
The weak quarter underscored mounting economic concerns in Brazil, which has struggled to contain inflation and stay competitive in recent years, tarnishing the promising reputation it earned with a decade of robust growth.
A full-blown recession remains unlikely in Latin America's largest economy, but the slowdown highlights the chances of weak growth and a possible credit rating downgrade next year, when President Dilma Rousseff is expected to seek re-election.
Vanishing growth - combined with new evidence of stagnation from January to March - reinforced expectations that Brazil's central bank could soon wrap up a cycle of interest rate hikes aimed at cooling inflation.
Yields on interest rate futures fell on Tuesday as traders bet increasingly on a single, smaller rate hike in January.
Brazil's toughest month seems to have been July, following widespread protests against poor public services.
The rebound since then has been weak and economists are slashing forecasts for 2013 and 2014, which is expected to be even more sluggish.
“The fourth quarter started weak and growth (this year) should be closer to 2.2 or 2.3 percent than the 2.5 percent we had before,” said Flavio Serrano, an economist at Espirito Santo Investment Bank.
“We were not able to grow despite various economic stimulus measures ... due to a macroeconomic imbalance with little production and a lot of consumption.”
The stagnation in Brazil contrasts with major emerging-market peers such as Mexico, India and China, where economic growth recovered between July and September after disappointing in the first half of the year.
Brazil is out of step due largely to heavy government stimulus over the past year that is starting to lose steam.
The tax breaks and cheap loans unleashed by Rousseff have yielded meager results, and their withdrawal is now clouding the outlook for carmakers and furniture factories.
Public spending grew 1.2 percent in the third quarter, the economy's strongest driver of new demand, but officials have warned there is no room for more stimulus as tax revenues dry up and the government misses budget targets.
TOUGH YEAR AHEAD
That leaves Rousseff with little margin for error at the end of her first term.
Next year promises to be a handful for the president, as she juggles preparations for hosting the World Cup, scepticism from business leaders and a likely withdrawal of monetary stimulus in the United States.
The private sector remains wary of picking up the slack.
Investment fell by 2.2 percent from the second quarter, as stifling costs and sour business sentiment discouraged capital spending.
Raw material exporters such as iron miner Vale SA have also cut investment plans in the face of lower global commodity prices.
The biggest drop in output last quarter came from the farm sector, which shrank 3.5 percent after a major harvest ended, giving back some of the gains of a strong second quarter.
A surprisingly sturdy job market is one of the few bright spots in the economy, with unemployment holding near record lows, although consumer prices have been rising faster than salaries for most of the past year.
Household consumption advanced 1.0 percent in the quarter and advanced less from a year earlier than it did from April to June.
Retail sales have slowed sharply this year, growing year-on-year at about half the pace of 2012.
Glancing at the bustling bars of Rio or the packed streets of Sao Paulo you might not notice, but beer consumption and new car sales are falling this year for the first time in a decade.
Brazilian factories are still struggling to compete with foreign manufacturers, and more assembly lines went idle as tax breaks for many sectors began to expire in the third quarter.
The industrial contribution to GDP was just 0.1 percent.
But even the services sector, which faces less foreign competition, expanded only 0.1 percent in the quarter.
As services play an increasingly important role in Brazil's economy, IBGE has modified its methods for calculating growth, leading to a revision of data from recent years.
Brazil expanded 1.8 percent in the second quarter and remained flat in the first quarter of 2013, IBGE said on Tuesday, compared to previously reported growth rates of 1.5 and 0.6 percent respectively.
The third quarter of 2011, which had previously been registered as a 0.1 percent contraction, was revised up to reflect zero growth in the period. - Reuters