Brazil: Recovery continues to disappoint
Growth in Brazil disappointed once again in 1Q2013, as the economy grew only by 0.55% qoq. Growth was primarily driven by the strong performance of the agricultural sector.
Investment was very strong in the first quarter, but we expect it to become less vigorous in the rest of the year.
Meanwhile, private consumption, which has driven growth in recent years, slowed down strongly.
The central bank has hiked the policy rate and is expected to continue to do so in the months ahead.
All in all, we now expect the economy to grow by only 2¼% this year.
Source: EIU, IBGE & Rabobank
Another disappointing quarter
For Brazil, 1Q13 was yet another disappointing quarter, as the economy grew 0.6% qoq, after it had grown 0.64% qoq in 4Q12. This means that growth remained below the potential rate. What is more, growth would have been worse, had the agricultural sector, which accounts for 6% of GDP, not grown very rapidly. Thanks to a record harvest, agricultural GDP grew by 9.7% qoq SA and 17% yoy. Services (+0.5% qoq) and industry (-0.3%) performed much less well. Meanwhile, we note that on the demand side inventory growth contributed a strong 140 basis points to growth in 1Q, which bodes not well for growth in the rest of the year. Gross fixed capital investment grew by a strong 4.6% qoq.
Investment growth very strong, but likely to fall
The pick-up in investment seems good news, especially as Brazil has a very low investment ratio and the economy is suffering from supply constraints. However, we are not convinced that investment growth will remain this strong. At first sight, the April industrial production data give reason for optimism, as capital goods production increased by 13.4% yoy in the first 4 months of 2013. However, the fact that machinery and equipment investment performed particularly strongly, suggests that investment growth is partly driven by the good performance of agriculture. Meanwhile, the HSBC manufacturing PMI has fallen in recent months and is now just above contraction levels.
Consumption no longer the driver of growth
Meanwhile, private consumption, which drove economic growth in Brazil in the past years, was particularly weak. In 1Q13 it grew by only 0.1% qoq. At the same time, retail sales fell in yoy terms for the first time since 2008 (by 0.2%). It seems that lower real wage growth amid high inflation had a negative impact on consumer confidence. According to the Getulio Vargas Foundation, consumer confidence has been falling gradually since September 2012, although it remains at a relatively high level. Looking ahead, we do not expect a strong recovery of private consumption in the coming quarters, as the high growth levels of the past years are unlikely to return soon.
Central bank is becoming more hawkish
In response to high inflation the central bank has become more hawkish recently. On 30 May, it increased its main policy (SELIC) rate by 50 basis points to 8%. One month earlier it had already increased the rate by 25 basis points, up from the record low level of 7.25% reached in mid-2012. The tightening of monetary policy took place after inflation temporarily increased above the 2.5-6.5% target range to 6.6% yoy in March. Inflation is likely to fall in the coming months, thanks to falling food inflation, while core inflation is likely to remain close to 6%. We expect the central bank to further increase rates in the coming month, as it seeks to re-establish its credibility.
Source: EIU, IBGE
Strong fall of the real
Meanwhile, the real has fallen rapidly recently to the lowest level in 4 years. It is part of a wider trend; the currencies of several Emerging Markets have been falling, as investors are anticipating a tapering of the ultra-loose monetary policies in the US. However, part of the fall may also be related to the disappointing 1Q13 growth data. The central bank has intervened to limit the depreciation of the real and has abolished controls on inflows. Given the low level of openness of the Brazilian economy, we expect the decline of the real to have only a limited impact on growth. Overall, we expect the economy to grow now by only 2¼% in 2013.