Brazil’s economy continued to disappoint in the three months to March as real GDP growth rose by a sluggish 1.9% from a year earlier. Although the latest reading came in above the previous quarter’s 1.4% increase, it was still well below market expectations. In q-o-q terms, output was up 0.6%, unchanged from the Q4 2012 figure. A breakdown of the Q1 quarter national accounts showed that consumption, which had been the principal driver of growth, is beginning to falter. Household consumption growth was largely flat compared with the previous three months and moderated sharply from a year earlier. Furthermore, government consumption followed a similar trend over this period. The sharp contraction in exports in both q-o-q and y-o-y terms also acted as a drag on Q1 growth, but some positive news came in the form of a rebound in investment. Gross fixed capital formation accelerated by 4.6% (q-o-q) and in y-o-y terms advanced by 3.0%. On the supply side, the agricultural sector posted an exceptionally strong performance, in contrast to the decline seen in industry and subdued activity in services. Despite the recent weak GDP report, Banco Central do Brazil continued to tighten monetary policy at the end of May with a steeper-than-expected 50 basis-point increase in the benchmark SELIC rate to 8.0%. Moreover, the central bank’s hawkish comments suggest that it is no longer willing to tolerate inflation staying well above the mid-point target of 4.5%. May’s inflation report shows price increases coming in at 6.5% (y-o-y), unchanged from April. With the focus shifting away from stimulating growth toward fighting high inflation, our panel reckons that interest rates will head higher still in the months ahead.
On the external front, Brazil saw its current account deficit hit a record high of US$8.3bn in April, exacerbated by the trade balance slipping into the red because of falling commodity prices and rising import costs for fuel. Faced with the deterioration in the external accounts, strong inflation and weak growth, credit agency Standards & Poor’s recently downgraded the outlook for Brazil’s sovereign debt from stable to negative. Meanwhile, growth prospects have tumbled again for 2013.
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