Brazil Watch Lower growth, higher inflation
Group Economics Emerging Market Research Marijke Zewuster +31 20 3830518
17 June 2015
GDP declined less than expected in Q1 thanks to stronger export growth, but stronger contraction expected in Q2 Inflation figures worse than expected due to higher food and administered prices Despite further contraction, we maintain our view that the Selic rate will be raised to at least 14% this year
Drop in economic growth
Although the positive contribution of the external sector will
Economic growth fell -0.2% qoq and -1.6% yoy in the first
increase in the coming months, this will not be enough to
quarter of 2015. Thanks to a stronger increase in exports, this
compensate for the further decrease in domestic demand.
was somewhat less than market expectation (-1.8% yoy).
Meanwhile, rising unemployment will add to the fall in
Compared to the previous quarter, exports rose 5.7%, which
consumption and there are no signs of a turnaround in
was the first positive figure for four quarters. While the external
investments. The tighter fiscal stance will also weigh heavily
sector contributed positively to growth, internal demand fell
on this year’s growth outlook. We therefore maintain our
further. Consumer demand declined 0.9% yoy, which was the
forecast of -1% GDP growth for 2015.
first negative annual growth figure since September 2003. The decrease in investments rose from -5.8% yoy in Q4 to -7.8%
Inflation surges
yoy. On the production side, agriculture and mining continue to
Despite the sharp economic slowdown, inflation continues to
show substantial growth, whereas manufacturing, construction
rise in almost every category, reaching 8.5% yoy in May, up
and retail experienced the strongest decline.
from 8.2% in April. Most of the price increases are related to the fiscal adjustment currently being implemented, as
GDP and consumption growth
administered prices surged 14.1% yoy, after rising 13.4% in
% yoy
April. But non-administered prices were up as well, from 6.7% yoy in April to 6.8% in May. In the latter category, tradable
10 8
goods prices rose from 5.6% yoy in April to 5.7% in May.
6
Looking at individual items, electricity prices remain one of the
4
main sources of inflation, while bad weather caused food
2
prices to jump from 8.0% yoy in April to 8.8% in May. Although
0
higher interest rates will do little to tame this type of price increase, it still could help to limit the secondary effects in a
-2
country were inflation indexing is still pretty much alive and
-4 06
07
08
09 GDP
10
11
12
13
14
15
Consumption
well. We therefore believe that although the end of the tightening cycle is near, one or two more rate hikes are very likely. That could bring the Selic rate to 14% or higher by the
Source: Bloomberg
end of this year.
Stronger contraction expected in Q2
Key forecasts for the economy of Brazil 2012
The first figures available for the second quarter point to a
2013
2014
2015e
2016e
deepening of the recession. Industrial production fell -7.6% yoy
GDP (% yoy)
1.8
2.7
0.1
-1.0
2.0
in April, down from -3.5% in March. And after a positive figure
CPI inflation (% yoy)
5.4
6.2
6.3
8.3
5.8
-1.8
-2.9
-6.5
-6.5
-4.0
in March, retail sales shrank again sharply in April. Nor is the picture bright for May PMI figures. The composite PMI fell from
Budget balance (% GDP)
an already weak 44.2 in April to a 6-year low of 42.9. The
Government debt (% GDP)
55
53
59
64
64
services PMI showed the strongest decline, down from 44.6 in
Current account (% GDP)
-2.2
-3.4
-4.0
-4.0
-4.0
from a low 46 in April, to 45.9. According to the HSBC press
Gross fixed investment (% GDP)
20.2
20.5
19.7
18.7
18.4
release, the manufacturing sector showed sharp declines in
Gross national savings (% GDP)
18.1
17.3
16.2
14.5
14.4
April to 42.5, while the manufacturing PMI fell only fractionally
both output and new orders, which resulted in a significant fall in employment as well. Indeed, the unemployment rate rose
USD/BRL (eop)
2.0
2.3
2.7
3.2
3.4
from 7.9% in March to 8% in April and could easily jump above
EUR/BRL (eop)
2.7
3.2
3.2
3.0
3.7
10% by the end of this year.
Budget b alance, current acc. for 2015 and 2016 are rounded figures Source: EIU, ABN AMRO Group Economics