Updated on www.ft.com at 10.11 pm on December 6, 2011
Brazil's economy stalled in the third quarter of this year, demonstrating the vulnerability of the world's emerging market growth engines to the eurozone crisis and the slowdown in the developed world.
Gross domestic product contracted 0.04 per cent in the three months ending on September 30 compared with the previous quarter as weakness in the industrial sector spread to Brazil’s once vibrant consumer.
"Consumption is really slowing down – it's no longer something that people feared might happen, it's gradually being realised," said George Lei, an economist with Nomura in New York.
The sharp deterioration in growth in Brazil poses political challenges for Brazil's president Dilma Rousseff and comes as China reported last week that manufacturing activity in November contracted for the first time in almost three years.
China, Brazil and India, the three largest emerging economies, are all now slowing, according to their latest GDP figures.
The eurozone crisis is hitting confidence while economic slowdown in Europe and the US is undermining demand both for manufactured goods from emerging markets and for the minerals produced by resource-rich countries such as Brazil.
Other big emerging economies, notably Russia and Indonesia, posted increases in third-quarter growth, though even in these economies, the authorities see a looming slowdown.
Emerging market growth rates are forecast to remain much higher than in the developed world, with China, for example, predicted to grow at around 8 per cent in 2012.
The Asian Development Bank on Tuesday forecast east Asia's economic growth next year would slightly drop to 7.2 per cent, with a worst-case scenario of 5.4 per cent.
But economists are concerned that will not be enough to rescue the world economy.
For Brazil, the fall in annualised growth in the third quarter to 2.1 per cent compared with a year earlier – the lowest quarterly reading since the third quarter of 2009 – is particularly pronounced, coming after 2010 when the economy grew 7.5 per cent.
The slowdown follows a series of interest rate increases in the first half of the year, as the central bank sought to cool overheating in the economy following a huge fiscal stimulus in 2010, when the ruling coalition was contesting a presidential election.
Brazilian industry this year was also hit by a strong exchange rate that undermined its competitiveness against imports, with car sales in particular collapsing since August.
The final blow was the eurozone crisis, which has begun to affect consumer sentiment.
"The slowdown in economic activity resulted from … measures taken by the Brazilian government in order to maintain sustainable growth, the deterioration of the international economy, and the natural slowdown after 2010, when the Brazilian economy was rapidly recovering from the 2009 recession," said Finance Minister Guido Mantega.
President Rousseff has announced stimulus measures and the central bank has begun slashing interest rates to try to prevent the economy from slipping into negative territory in the coming months.
The deceleration affected all elements of the economy except exports and agriculture, with private consumption contracting 0.08 per cent in quarterly terms – the first decline since the 2008-2009 crisis.
Imports also contracted compared with the second quarter, down 0.37 per cent, compared with quarter-on-quarter growth of 5.3 per cent in the second quarter, indicating that Brazilians' recent retail splurge is losing steam.
However, economists said the government had room to cut interest rates and introduce more budgetary stimulus measures.
This would drive a recovery in the second half of next year, with most economists predicting 3 per cent or lower growth for 2011 and just over 3 per cent in 2012.
"If the recession in Europe is deeper than we think, there could be a risk of technical recession in Brazil but nothing compared with what's happening in the developed world," said Marcelo Salomon, economist at Barclays in New York.
© The Financial Times Limited 
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