Brazil: Growth accelerates, but new slowdown likely
Brazil’s economy grew surprisingly fast in 13Q2. In particular, the strong investment growth realised is highly welcome. However, we expect growth to slow down in the second part of 2013.
Economy grows at quickest rate in three years…
With 1.5% q-o-q growth, up from 0.6% in 13Q1, the Brazilian economy grew at the most rapid pace in more than three years in the second quarter of 2013 (figure 1). Growth came in above consensus expectation. On the supply side, activity was supported by strong performance of the agricultural sector. This sector grew by 3.9% q-o-q amid a good harvest. Furthermore, after a long period of stagnation, there was also a recovery in the industrial sector (+2.0% q-o-q). However, growth in the services sector was relatively weak (0.8% q-o-q). On the demand side, the most important development was the high growth of gross fixed capital formation (3.6% q-o-q). It seems that investment was partially driven by the government stimulus measures such as tax breaks. Meanwhile, growth of private consumption (0.3% ) and government consumption (0.5%) was rather subdued. Overall, there was more or less a reversal of the situation seen in 2011 and 2012, when investment was very weak while consumption remained strong. This rebalancing, if continued going forward, is very desirable for the Brazilian economy, as the tight labour market, high inflation and the current account deficit show that growth is being held back by supply problems.
…but Brazil is feeling the impact of tapering
Like many other emerging markets, Brazil has been affected by the US ‘tapering news’− a gradual slowing down of the rate of asset purchases by the Federal Reserve. The rise in US interest rates has resulted in capital outflows from emerging markets with large current account and fiscal imbalances. Brazil has been, therefore, particularly hit. Between May 22 (Bernanke’s testimony to the US Congress) and August 19, the real fell by 15% against the US dollar. In the subsequent period, the currency pared back some of its losses, partially thanks to a USD 60bn foreign currency swap intervention programme announced by the central bank. At the time of writing, the real was still 10% below its May 22 level (figure 2). The weaker currency is likely to put upward pressure on inflation. To maintain its inflation credibility, the central bank continued its tightening cycle that started in April 2013 (figure 3). In late August, the central bank increased its benchmark Selic rate by another 50 basis points to 9%. The good news is that inflation has slowed a bit from 6.7% in June to 6.1% in August, but remains in the upper end of the target range (2.5%-6.5%).
Growth in the second half of 2013 is likely to slow down
Overall, we expect economic growth to slow down in the rest of 2013. First, consumer confidence remains relatively weak. Second, business confidence is also weak with both the HSBC services PMI (49.7) and manufacturing PMI (49.4) in contraction territory in August (i.e. below the neutral level of 50). Third, the tightening of monetary policy and less benign financial conditions due to the tapering news are likely to put downward pressure on consumption and investment. As regards the latter, we already saw a 3.3% m-o-m drop in capital goods production in July, which suggests that investment has already started to weaken.