Brazil: Recession? What Recession?– March 2104
British Embassy Brasilia
Brazilian 2013 GDP delivers a significant upside shock. 0.7% growth in Q4 confounds pessimistic analysts, with some predicting Brazil was in a recession. Annual growth of 2.3% is a solid improvement on 2012. But growth may slip back in 2014, while persistent inflation forces further interest rate rises. A realistic primary surplus target calmed the markets, but will be tough to deliver.
Brazil’s GDP grew 2.3% in 2013, up from 1% in 2012, a little below the government’s (optimistic) forecast although ahead of most independent expectations. But Q4 was a universal positive surprise, as GDP grew 0.7%, confounding local analysts with the most pessimistic suggesting that Brazil’s economy may have stalled or even been in recession in the 2nd half of 2013.
Growth was driven by strong results in the services sector. Services increased 0.7% in Q4 and 2% in the year, led by information services, transport and commerce. Agriculture was another highlight, growing 7% in the year, despite no growth in Q4. The sector had good results in both production and productivity.
More positive news came on the demand side, with investments growing 6.3% year-on-year, building on strong increases in the production of machines and equipment. Household consumption, the traditional driver of the economy, grew by a solid but slower 2.3%, hinting that a long awaited rebalancing of demand from consumption towards investment may be underway.
Industry remains the main drag on growth. It grew only 1.3% in 2013, after a decrease of 0.2% in Q4. Lower commodity prices saw a sharp drop in extractive industries’ output, but manufacturing remains the main concern, contracting 0.9% in the fourth quarter alone. Brazil’s ever declining trade balance reflects their woes, with imports growing more than 3 times as fast as exports.
Despite the positive surprise, prospects for 2014 are weaker. With inflation above 5.5% the Central Bank was forced into another interest rate rise, by 25bps to 10.75%. The Bank has slowed the pace of rate increases, but further hikes are expected. Industry is expected to struggle again, as the government unwinds tax incentives for key industries such as automotives, and exports are further hit by uncertainty in Argentina and Venezuela. A prolonged summer drought means agriculture may take a hit this year too. The consensus amongst local analysts is for growth to slip back to 1.7% in 2014.
Q4’s figures will be welcome news for the government, but only temporarily. Brazil’s economic policy is being heavily criticised at home and abroad. The present Government’s 3 years have so far delivered average growth below 2%, compared to the 4%+ enjoyed under the previous Administration, while the trade balance has dropped 87% from USD20.2bn in 2010 to USD2.6bn in 2013. President Dilma is hoping that more investment in education and in infrastructure will mitigate some of these concerns.
In an effort to restore confidence, last week the government announced a budget cut of £11bn and a more credible primary surplus target for this year of 1.9% of GDP. Fitch and Moody’s noted that the cuts, if implemented, are consistent with Brazil maintaining its debt rating, but that caveat is important. Finance Minister Mantega missed the G20 meetings in Australia to thrash out the finer details of the budget, which includes a £1bn cut for the defence ministry and a £1.75bn cut in the PAC investment programme . A positive growth surprise means the government will head off for the Carnival break in high spirits, but there is much hard work ahead.
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