Efforts to analyze Brazil’s economic momentum have been complicated by frequent revisions in incoming data by the Statistical Institute due to a change in the base year of comparison. Although incoming data continues to suggest the economy is showing overall signs of improvement, recentdata has been mixed and the road to recovery will be long given the severity of the recession. The economic activity index grew at a multi-year high in February, while industrial production fell sharply in March and retail sales plummeted in the same month. President Michel Temer’s proposal
to reform the country’s costly social security system cleared one hurdle on 3 May, when it was approved by a lower house committee. Although the reform is vital to help correct fiscal imbalances, it is deeply unpopular among voters and has led to large-scale protests. The reform still needs
to clear a number of votes to be passed, which may prove too much of challenge with an election looming in 2018. A gradually improving business environment, higher commodity prices and
an improved global backdrop should allow the economy to exit the worst recession in modern history this year. However, growth will be moderate as high unemployment dents household spending. Analysts see GDexpanding a meagre 0.6% in 2017, which is up 0.1 percentage points from
last month’s forecast. The recovery is seen gaining speed in 2018 andGDP should increase 2.4%.
Inflation fell to an over six-year low of 4.1% in April (March: 4.6%). A sharp reduction in price pressures is giving the Central Bank space to support the economic recovery and it slashed the rate to 11.25% at its April meeting.
The panel expects inflation to end 2017 at 4.1% and 2018 at 4.3%.
REAL SECTOR | Economic activity grows at multi-year high in FebruaryIn February, economic activity grew 1.3% from the previous month in seasonally-adjusted terms, according to the Central Bank’s monthly indicator for economic activity (IBC-Br, Indice de Atividade Economica do Banco
Central). The result marked the fastest growth in over seven years and wasan improvement from January’s revised 0.6% increase (previously reported:-0.3% month-on-month). In addition, the reading beat market analysts’expectations of a 0.6% expansion and provides evidence that the country is emerging from the worst recession in decades.
On an annual basis, economic activity fell 0.7% in February, which contrasted January’s 0.5% increase. Meanwhile, the trend improved and the annual average variation in economic activity came in at minus 3.9%, which was up from January’s minus 3.9%.
The Central Bank sees the economy growing 0.5% in 2017. Our panel of analysts is in line with the Bank’s view and sees the economy growing 0.6% this year, which is up 0.1 percentage points from last month’s forecast. For next year, the panel projects that growth will accelerate to 2.4%.
REAL SECTOR | Industrial production shrinks in March In March, industrial production plunged 1.8% from the previous month in seasonally-adjusted terms, which was worse than February’s revised flat growth (previously reported: +0.1% month-on-month). The result marked the largest contraction in seven months and was worse than market expectations of a more moderate 1.0% decrease. Broad-based declines were seen across the index, with production of consumer goods dropping at the sharpest pace in over a year.
In annual terms, industrial production returned to growth and increased 1.1% (February: -0.7% year-on-year). 16 of the 26 categories that the Brazilian Institute of Geography and Statistics (IBGE) surveyed recorded expansions as green shoots emerge in the battered economy. The largest increase was seen in production of motor vehicles, trailers and bodies. Annual average variation in industrial production improved from minus 4.6% in February to minus 3.6% in March.
Panelists participating in the LatinFocus Consensus Forecast see industrial production growing 1.3% in 2017, which is up 0.1 percentage points from last month’s estimate. In 2018, industrial output is expected to grow 3.4%.
REAL SECTOR | Manufacturing PMI crosses into expansionary territory for first time in over two years Conditions in Brazil’s manufacturing sector improved notably in April as the
Markit manufacturing Purchasing Managers’ Index (PMI) came in above the crucial 50-threshold that separates expansion from contraction in business conditions in the manufacturing sector. The index rose from 49.6 in March to 50.1, the best result since January 2015. The upturn provides further evidence that green shoots are finally emerging in the battered economy.
According to IHS Markit, the improvement reflected the increases in output and new orders, which grew for the second consecutive month. However, unlike March’s result, stronger internal demand boosted new work, while external orders fell. Despite the overall positive reading, the upturn in conditions failed to stimulate employment and firms continued to shed jobs. Meanwhile, the
weak real continued to put upward pressure on input costs, however, output charge inflation eased to a five-month low. Overall, firms has an optimistic outlook for production in the next year, in part thanks to an improving economic picture in the country.
REAL SECTOR | Retail sales plunge in March Retail sales (excluding cars and construction) plummeted in March, falling at the sharpest pace in over two years. Sales fell 1.9% from the previous month in seasonally-adjusted terms, a more pronounced contraction than February’s
revised 1.6% decrease (previously reported: -0.2% month-on-month) and then market analysts had expected. The IBGE has been making frequent revisions to data due to a change in base year in recent months, complicating efforts to analyze Brazil’s economic momentum. Overall, although the country’s deep recession has past rock bottom, the result suggests that household spending
is meagre in the face of high unemployment. Looking at March’s result in detail, contractions were recorded in four of the eight components of the index. The monthly drop was driven largely by a
steep decline in sales of food, beverages and tobacco, the most significant category of the index.
On an annual basis, retail sales decreased 4.0% in March, which was a deterioration from February’s 3.7% decline. Despite the poor result, the trend inched up as the annual average variation in retail sales rose from minus 5.4% to minus 5.3%, an over one-year high.
Panelists participating in this month’s LatinFocus Consensus Forecast expect retail sales expanding 0.4% in 2017, which is up 0.5 percentage points from last month’s forecast. For 2018, the panel sees retail sales growing 2.2%. OUTLOOK | Consumer confidence falls in April
The consumer confidence index published by the Getulio Vargas Foundation (FGV, Fundaçao Getúlio Vargas) decreased a seasonally-adjusted 3.6% from the previous month in April, erasing some of the previous month’s gains. The index fell from March’s 85.3—the best result since December 2014—to 82.2.
The moderation was driven by consumers’ more pessimistic views regarding the current and future economic situations compared to the previous month.
The FGV confidence index spans a range from 1 to 200 points, where 100 points is considered neutral. The index currently lies deep in pessimistic territory.
Panelists surveyed for this month’s LatinFocus report see private consumption recording zero growth in 2017, which is up 0.2 percentage points from last month’s estimate. For 2018, the panel sees private consumption rising 1.8%.
OUTLOOK | Business confidence hits almost three-year high in April
Business sentiment rose in April, climbing to its highest level in nearly three years. The Getulio Vargas Foundation’s (FGV, Fundaçao Getúlio Vargas) business confidence index increased a seasonally adjusted 0.6% from the previous month, rising from March’s 90.7 points to 91.2 points. Despite the rise, the index still remains below the 100-point threshold that signals that
businesses are more pessimistic than optimistic.
According to FGV, the result came as firms grew less pessimistic regarding their expectations for the future economic situation. However, firms’ views on the current economic situation deteriorated.
Panelists participating in the LatinFocus Consensus Forecast see fixed investment rising 1.8% in 2017, which is up 0.1 percentage points from last month’s forecast. In 2018, participants expect fixed investment to gain steam and record a notable 6.8% expansion.
MONETARY SECTOR | Inflation falls to lowest level since July 2010 Consumer prices in April increased 0.14% over the previous month, which was below March’s 0.25% rise. The slowdown came largely due to a cut in electricity rates, which lowered the housing category of the index.
Inflation continued to drop in April, falling to an over six-year low of 4.1% (March: 4.6%). The result was in line with market expectations. The sharp fall will give the Central Bank space to continue with its easing cycle to support an economic recovery. Inflation is within the Central Bank’s target band of 2.5%-6.5%.
In a scenario with constant interest and exchange rates, the Central Bank sees inflation at 3.6% at the end of 2017 and easing to 3.3% by the end of 2018. In a scenario based upon market expectations, the Central Bank sees inflation ending 2017 at 4.1% and 2018 at 4.5%. FocusEconomics participants see inflation closing the year at 4.1%, which is down 0.2 percentage points from last month’s forecast. For 2018, the panel expects inflation to come in at 4.3%.
MONETARY SECTOR | Central Bank slashes SELIC rate to 11.25% to support depressed economy
At its 13 April meeting, the Central Bank’s Monetary Policy Committee (COPOM, Comite de Politica Monetaria) decided to cut the benchmark SELIC interest rate by 100 basis points, stepping up the pace of monetary easing from February’s meeting. The SELIC rate now rests at 11.25%. The
committee’s decision matched market analysts’ expectations as the Central Bank moves to support economic growth in the battered economy. Favorable inflation data has allowed the Bank space to loosen monetary conditions and is what primarily drove the decision. Price pressures have
eased faster than previously expected and decreasing food prices should act as a positive supply shock going forward. While the Bank commented that the economy is stabilizing, lingering uncertainties over U.S. economic policy and the future evolution of commodity prices could threaten the improvement. The Bank updated its inflation forecast in the market scenario and now sees inflation ending the year around 4.1% in 2017, under the assumption that the SELIC rate ends the year at 8.50%.
The monetary authority’s communique suggested that it will stick with 100 basis-point cuts going forward, although this will depend on incoming data. Both upside and downside risks are plaguing Brazil’s inflation outlook, such as the approval of fiscal consolidation measures, the uncertain external environment and shocks in food prices. Commenting on Nomura’s outlook for
future easing, Latin American strategist Joao Pedro Riberio states: “Our expectations of a combination of: benign inflation, slow activity recovery (with very negative output gap) and eventual government success on social security reform, lead us to believe that an acceleration in the cutting pace is, currently, more likely than a deceleration. Naturally, negative surprises (particularly on the political front) would alter these likelihoods.” All of our analysts see the Central Bank cutting the SELIC rate further by the end of the year, with an average forecast of 8.72%. Next year, our panelists see the SELIC rate ending at an average of 8.60%.
EXTERNAL SECTOR | Current account records first surplus since 2009 Brazil’s current account balance swung to surplus in March, coming in at USD 1.4 billion. The result marked the first surplus in nearly 8 years and starkly contrasted the USD 900 million deficit recorded in the same month of 2016. The improvement surprised market analysts who had forecast a USD 900 million gap. The trade surplus rose to a multi-year high of USD 7.1 billion in March, boosting the current account. Exports growth recorded a third consecutive double-digit expansion over the same month last year, while imports also expanded robustly, but at a slower pace. Meanwhile, foreign direct investment picked up from February and came in at USD 7.1 billion.
In March, the 12-month accumulative current account deficit narrowed slightly to USD 20.6 billion from USD 22.8 billion in February. March’s result marked a deficit of approximately 1.1% of GDP.
FocusEconomics participants expect a current account deficit of 1.2% of GDP in 2017. For 2018, the panel sees the deficit worsening to 1.7% of GDP.
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