The Brazilian Economic Activity Index showed that Brazil's economy continues to grow at one of the fastest rates in the world. In the first quarter of 2010 the economy expanded 9 per cent year-on-year.
Performance of index, sector and funds over 1-yr
Source: Financial Express Analytics
Data shows that the populace is optimistic about the state of the economy. In April the number of people entering the labour market was the highest for six years. The results of a survey released on Thursday show that the 'economically active population' grew by 130,000 last month.
This increase in the workforce has reduced the level of unemployment in Brazil. Figures released on Thursday by the Brazilian Institute for Geography and Statistics show that unemployment is at 7.5 per cent, the lowest level since 2002.
"Employment growth is widespread, and scattered across all sectors," said Sergio Mendonca from the Department of Statistics and Socioeconomic Studies.
Markets across Latin America fell in May as a result of uncertainty in the eurozone and widespread investor risk aversion. Fund managers continue to be optimistic about the state of the Brazilian economy and some have taken advantage of what they see as a short term market weakness to add to existing positions.
Threadneedle's Julian Thompson believes there is a very positive outlook for the Brazilian financial sector and has consequently increased his holding in the market leading Itau Unibanco.
Dean Newman, manager of Invesco Perpetual's Latin American fund, says that despite market turbulence brought on by Europe's debt crisis economic news from Latin America, particularly Brazil, continues to be upbeat.
Top 5 rising funds over 1-yr
| Rank | Fund | 1-yr (%) |
|---|---|---|
| 1 | CF Ruffer Baker Steel Gold | 90.0 |
| 2 | Smith & Williamson Global Gold & Resources | 75.0 |
| 3 | Invesco Perp Latin America | 66.9 |
| 4 | JPM New Europe | 66.6 |
| 5 | MFM Slater Growth | 66.3 |
Source: Trustnet.com
"The buoyant labour market, reinforced by positive business and consumer surveys, has led to a further upgrade in economic growth expectations for this year", said Newman. He believes that the sovereign finances of Latin American economies are more robust than the public-sector finances in Europe.
However, some market analysts are beginning to argue that the economy is at risk of overheating and cannot cope with such rapid growth without better infrastructure and a more skilled workforce. They believe Brazil’s growth is getting out of control and inflationary problems will soon come. In response to these comments, finance minister Guido Mantega argued that the economy is growing at a sustainable pace is not overheating.
He said: "The economy is on track for sustainable growth of around 6 or 6.5 per cent by the end of the year."
Analysts are pointing to the rising inflation levels to highlight their fears for the state of the Brazilian economy. Mantega has been forced to admit that inflation levels at the end of the year are likely to be above the government’s target of 4.5 per cent.
The effect of this rising inflation has been a reduction in the average real value of workers' wages.
Henrique Meirelles, president of the central bank, has been more willing to admit that Brazil might have an inflation problem. He has said that policymakers are in a 'tightening mood' and has vowed to take 'vigorous action' to prevent the economy from overheating.
In an effort to contain inflation, the government has cut spending by $5.5bn and the central bank has raised interest rates this year by 1.5 per cent, from 8.75 per cent to 10.25 per cent. Interest rates in Brazil are among the highest in the world.
Brazilian policy makers are facing a difficult challenge – keeping inflation down whilst ensuring the economy keeps growing.