Brazilian Economy Looks to Set For Recovery

Brazilian economy expanded for the first time in two years in the March 2017 quarter and recent data points to recovery in private investment and production. However, sustained growth is heavily dependent on the government ability to pass fiscal reforms, reduce fiscal imbalances and restore consumer and business confidence which may be very difficult to achieve as President Tamer has been recently implicated in the corruption scandal.

The GDP grew 1 percent on quarter in the first three months of 2017, due to a jump in exports of oil, iron ore and soybeans and a smaller drag from consumer spending. On the production side, record harvest boost agriculture. On the negative side, public spending fell and investment continued to shrink while the services sector were flat. 

The Industrial Entrepreneur Confidence Index has been recovering since the beginning of 2017 after reaching a record low of 36 in December of 2015. The index reached 53.7 in May, staying above 50 for the fifth consecutive month as managers remain confident in the future amid lower interest rates, fiscal reforms and business-friendly measures the government intends to implement. The manufacturing PMI rose to 52 in May, pointing to the strongest expansion in factory activity since February of 2013. In addition, the services PMI went up to 50.3 in April, the first expansion since February of 2015.

The inflation rate eased for the eighth straight month to 4.08 percent in April, the lowest since July of 2007, falling below the central bank target of 4.5 percent for the first time since December of 2009. The inflation has been slowing faster than anticipated as the real strengthened, prompting the central bank to ease monetary policy. The benchmark Selic rate was already cut by 400bps since October last year, standing at 10.25 percent and is expected to reach 8.5 percent by the end of 2017.

On the negative side, the unemployment has been rising rapidly, breaking record highs and reaching 13.7 percent in March. The economy shed 1.371 million jobs in 2016, following a 1.625 million loss in 2015, bringing employment to 5-year lows and hurting household spending. As a result consumer spending has been weak: retail sales fell 4 percent year-on-year in March of 2017, marking the 24th straight month of decline. The jobless rate is expected to continue to rise during 2017 before starting to fall in 2018 as the economy recovers.

The fiscal deficit was recorded at 8.9 percent in 2016 after reaching a record high of 10.2 percent in 2015 amid falling revenues, several tax exemptions and higher expenditure. The rapid deterioration of the country's finances has significantly raised the country's debt burden, leading to a gross debt of 69.5 percent of the GDP in 2016, higher than 65.5 percent in 2015. The government of Michel Temer already passed a fiscal cap amendment that limits the growth of federal government spending to the rate of inflation for 20 years. It also intends to pass several other reforms including a rise in retirement age, cuts in pensions and social benefits in an attempt to restore fiscal balance and confidence. However, such measures are expected to face strong political opposition.

Joana Taborda |
6/1/2017 5:45:58 PM