Brazil: Economy Struggling to Maintain Q2 Upturn

LACF Chart

Following an unexpected upturn in growth in the March-June period, the much longed-for revival in economic activity already appears to be sputtering in the third quarter. This is backed up by the latest reading from the central bank’s IBC-Br economic activity index, which is widely seen as a leading indicator for GDP growth. The index reported only a slight increase in economic growth in August of 0.08% from a month earlier. Although this figure was much better than the 0.34% contraction posted in July, it was nonetheless below market expectations. In annual terms, economic activity was up 1.32%, compared to 3.38% in July. The downbeat report suggests that the economy likely struggled to expand in Q3 in spite of strong growth in sectors like retail. Following an upwardly revised 2.1% (m-o-m) surge in July, retail sales jumped unexpectedly again in August by 0.9%. A rebound in consumer confidence, along with lower inflation at supermarkets, helped to underpin retail activity. Robust labour market conditions should continue to lend support to the sector, particularly as September saw a surge in job growth. With the industrial sector remaining in the doldrums, as illustrated by output stagnating in August following a 2.4% (m-o-m) contraction in July, it is hoped that consumer spending will continue to shore up activity in the second half of this year. Real GDP growth expectations for 2013 have stayed at 2.4% this month, but forecasts for next year have been downgraded. In spite of the softness reported by recent leading indicators, the central bank has continued to tighten monetary conditions this month with a half percentage point hike in the SELIC rate to 9.5%. The latest move marks the fifth consecutive interest rate hike, and policymakers have signalled that further increases are likely, especially with inflation remaining worryingly high.

Meanwhile, credit rating agency Moody’s recently lowered the outlook for Brazilian government debt. Currently rated at Baa2, the agency decided to downgrade the outlook from positive to stable. Having already endured two years of sluggish activity, the agency reckons that Brazil will continue to experience low growth in the next few years. The latest move was influenced by the deterioration in the state of the economy and worsening public finances.

You can download a sample of Latin America Consensus Forecasts at www.consensuseconomics.com.

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