Brazil Watch The worst is yet to come
Group Economics Emerging Market Research Marijke Zewuster +31 20 3830518
12 May 2015 • • •
The recession will get worse in Q2 followed by a weak recovery starting in the second half of 2015 Inflation jumped to over 8%, while economic activity experienced sharpest decline since mid-2009 Despite marked slowdown, we expect the Selic rate to rise to 14% this year
Sharp drop in economic activity
reasonably successful in cutting expenditures, at least in real
First quarter GDP figures will be published on 29 May. Based
terms, revenues dropped even faster.
on the economic activity index, we expect the economy to shrink by at least 2% yoy. This index fell by 3.2% yoy in
Some success on the fiscal adjustment front
February, after a decline of 1.8% yoy in January – the
Given the decline in revenues, it is positive that the
strongest fall since July 2009.
government has booked a small success on the fiscal front, with the recent approval in the lower house of a bill that limits
The PMI and confidence indicators point to an even grimmer
access to unemployment benefits.
outlook for the second quarter. Business confidence fell to a new low in April and the HSBC PMI index continued to decline,
The approval came shortly after the so-called outsourcing bill
falling to 46 from 46.2 in March. At the same time, inflation
was passed, which raised further doubts about the strength of
surged to 8.2% in April and we expect it to further increase in
the government coalition. The outsourcing bill, which is aimed
the coming months. This makes it likely that the central bank
at making the labour market more flexible and boosting
will hike the interest rate by another 50 to 75 bp this year
productivity, was supported by the government coalition
before ending the current tightening cycle.
partner PMDB but strongly opposed by president Rousseff’s Labour Party (PT). Former president Lula of the PT even
‘Real’ interest rates still far from historic highs
called on Rousseff to veto the bill, while the Central Unica dos
%
Trabalhadores (CUT), a workers union with strong ties to the PT, took to the streets in April and is organising a nationwide
20
strike on 29 May to protest the bill and the austerity measures 15
in general.
10
The political turmoil together with the Petrobras corruption scandal will continue to weigh on growth prospects, as will the
5
restrictive monetary and fiscal policy. All this comes on top of existing structural shortcomings and remains a strong
0 04
05
06
07
08
09
selic minus inflation
10
11
12
inflation
13
14
15
selic
Source: Bloomberg
reminder that, aside from the much-needed fiscal improvement, structural reforms are also still badly needed. Key forecasts for the economy of Brazil 2012
2013
2014e
2015e
2016e
While economic indicators will continue to worsen in the
GDP (% yoy)
1.8
2.7
0.1
-1.0
2.0
coming months, we expect some improvement from the
CPI inflation (% yoy)
5.4
6.2
6.3
8.1
5.8
-1.8
-2.9
-6.0
-6.5
-4.0
second half of 2015. Still, growth is not expected to return to positive territory before the last quarter of 2015 and even then,
Budget balance (% GDP)
it will remain very weak.
Government debt (% GDP)
55
53
60
63
63
Current account (% GDP)
-2.2
-3.4
-4.0
-4.0
-4.0
A primary surplus of BRL 4.9 bn was achieved in the first
Gross fixed investment (% GDP)
20.2
20.5
19.7
18.7
18.4
quarter, equivalent to 0.3% of GDP. However, measured over
Gross national savings (% GDP)
18.1
17.3
16.2
13.0
13.2
First quarter fiscal figures still weak
twelve months, the primary deficit rose from 0.6% of GDP in February to 0.7% of GDP in March. In the same period the
USD/BRL (eop)
2.0
2.3
2.7
3.2
3.1
nominal deficit increased even more sharply, from an already
EUR/BRL (eop)
2.7
3.2
3.2
3.0
3.4
astonishing high of 6.8% to 7.8%. While the government was
Budget b alance, current acc. for 2014,2015 and 2016 are rounded figures Source: EIU, ABN AMRO Group Econom ics
2
Brazil Watch – The worst is yet to come – 12 May 2015
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