Brazil: Tepid Growth in Q3

The release of Q3 national accounts data show that the government is struggling to revive the economy as growth disappointed following a relatively upbeat Q2 performance. After expanding by a decent 1.8% (q-o-q) in the April-June period, real GDP growth shrank by 0.5% in the third quarter, dragged down by a 3.5% contraction in agriculture and weaker growth in both industry and services. On the demand side, private and government spending picked up moderately but gross fixed investment fell into negative territory, as did the trade sector. Compared with a year earlier, real GDP recorded an expansion of 2.2% in Q3, but this was still much weaker than the 3.3% rise posted in the prior quarter. Brazil’s policymakers have made repeated attempts throughout this year to kick-start growth with various tax breaks but to no avail. The latest GDP report has led to another downgrade to GDP growth expectations for 2013 and 2014 to 2.3%. Although government spending picked up in Q3, it remains to be seen whether momentum on this front can be maintained since there is little room for more stimulus, especially with public finances already under pressure. The rising budget deficit has raised fears in some quarters of a sovereign credit ratings downgrade. To avoid this, the authorities will have to demonstrate that it is serious about repairing the public finances. However, with the presidential election due next October, the government is likely to drag its feet with regard to introducing measures to prevent a further deterioration in the fiscal accounts. October’s fiscal numbers were weak and the long-awaited hike in fuel prices by Petrobas, the state oil company, was much smaller than anticipated. Many observers attribute Brazil’s economic woes to government policy rather than global headwinds, and this policy uncertainty has already weakened investor confidence and hit investment spending.

Meanwhile, the benchmark SELIC rate rose by 50 basis points to 10% last month, with the latest move representing the sixth hike in a row. Borrowing costs have risen by a total of 275 basis points since April, when the current tightening cycle kicked off. Although inflation has been trending lower since peaking at 6.7% (y-o-y) in June, it is still well above the central bank’s 4.5% mid-point target.


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