RaboResearch - Economic Research

Brazil: Economy contracts in third quarter 2013

Economic Update


The third quarter was a disappointing one for the Brazilian economy, as GDP contracted for the first time since 2009 on a quarterly basis. While growth in the coming quarters is likely to be somewhat stronger, leading indicators suggest that momentum will remain rather weak. 

A disappointing quarter

Brazilian GDP contracted by 0.5% q-o-q in the third quarter of 2013, making this the first quarterly contraction since 2009. On the demand side, the most noteworthy development was the fall of investment by 2.2% q-o-q, after several quarters of strong growth. Private and government consumption growth were rather strong (respectively 1.0% and 1.2% q-o-q). The fact that investment seems to have lost momentum is bad news, as Brazil needs to increase investment to boost its low structural growth rate. On the supply side, agricultural production fell by 3.5%, after growing strongly in the first two quarters of 2013. At the same time, growth in the industrial and service sectors were very weak in Q3 (both 0.1% q-o-q).

Table 1: Key economic data Brazil
Table 1: Key economic dataSource: EIU, Rabobank forecasts
Figure 1: Economic growth Brazil
Figure 1: Economic growthSource: IBGE

Weaker currency, higher policy rates

In recent months, the Brazilian real has once again depreciated strongly (see figure 3). While this should have improved the price competiveness of the country, the current account balance has continued to deteriorate. The current account deficit increased to USD 7.1bn in October, up from USD 2.6bn in September. It was the largest deficit on record for the month of October. The current account deficit in the period January-October was 3.6% of GDP, against 2.1% of GDP in the same period a year ago. Also as net FDI inflows no longer fully cover this deficit, Brazil has become more vulnerable to the Fed tapering that is expected to start soon. Meanwhile, the central bank has continued the tightening cycle that started in April 2013. In late November, it increased the SELIC benchmark rate by another 50 basis points to 10%. Inflation eased to 5.8% in November, but the recent fall was the result of smaller contribution from food prices. Although inflation has eased somewhat, it remains in the upper part of the 2.5%-6.5% target range. The central bank is, therefore, expected to continue its tightening cycle, although it may do so at a slower pace. So far, the real interest rate has increased already strongly (see figure 4), which is going to hurt fixed investment.

Figure 2: Exchange rate
Figure 2: Exchange rateSource: Reuters EcoWin
Figure 3: Monetary policy and inflation
Figure 3: Monetary policy and inflationSource: EIU, IBGE

Growth likely to remain relatively weak

Looking forward, we note that the most recent industrial production data have been relatively good, with industrial output growing on a monthly basis for the third month in a row in October. Growth in 13Q4, therefore, is likely to be better than the previous quarter. However, there is no strong evidence that the recovery is building momentum. First, business confidence is rather low. The HSBC manufacturing PMI fell back into contraction territory in November (to 49.7). As already mentioned, investment is likely to be negatively affected by the higher real interest rates, but also by the weakening of the real, which has made it more expensive for companies that produce primarily for the domestic market to import capital goods. Overall, after the weak performance of the economy in 13Q3, growth in 2013 as a whole is likely to be around 2.25%.


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