In the fourth quarter of 2015, Brazil's GDP plummeted 5.9%, driven by sizeable contractions in private consumption and investment. The sectors that suffered the most were commerce and manufacturing with declines rates well into double digits.
IHS perspective | |
Significance | The deterioration of the Brazilian economy continued in October–December 2015 with GDP falling 1.4% compared with the previous quarter and 5.9% with respect to the last quarter of 2014. |
Implications | Brazil's GDP is back to levels seen in late 2010; if the economy were to remain at fourth-quarter 2015 levels all through 2016 the full year's rate of change would be a 2.5% decline. This is because of the carry-over effect, as January–September output was higher than in October–December during 2015. |
Outlook | IHS's latest forecast calls for the Brazilian economy to contract 3.7% in 2016, we do not expect any significant recovery until 2019; corruption scandals, populism, and a lack of co-operation among politicians are preventing policymakers from implementing measures needed to correct the fiscal deficit and bring down inflation rapidly. |
The national statistics office of Brazil (IBGE) reported that seasonally adjusted GDP declined 1.4% in October–December compared with the previous quarter, this marks the fourth consecutive decline; i.e. Brazil is immersed in a deep and already one-year long recession. On the annual comparison, GDP fell 5.9% in the fourth quarter. For the full year of 2015, the Brazilian economy plunged 3.8%; this is the worst contraction since 1990.
Private consumption has deteriorated significantly and unlike previous years it did not help to offset the decline of other components of aggregate demand. Unemployment has increased and the Ministry of Labour reports that during 2015 over 1.6 million net formal jobs were lost; accelerating inflation is also eroding the purchasing power of income and IBGE points to a deterioration in real salaries. In addition, with less support from the government, state-owned banks are reducing lending to consumers and also private banks are tightening credit conditions as they perceive higher risks and see non-performing loans increasing. Finally, consumers who may enjoy job stability are also not eager to incur new debts as they perceive their household balances highly leveraged after several years of rapid credit growth.
Brazil's GDP – % change | |||||||||
2014 | 2015 | 2014/2013 | 2015/2014 | ||||||
Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Y/Y | Y/Y | ||
Agriculture | 0.7 | 0.8 | 4.7 | -3.6 | -3.0 | 2.9 | 2.1 | 1.8 | |
Mining | 3.7 | 1.5 | 2.7 | 0.0 | 0.0 | -6.6 | 8.6 | 4.9 | |
Manufacturing | 1.0 | -2.3 | -2.3 | -4.4 | -3.7 | -2.5 | -3.9 | -9.7 | |
Construction | -1.7 | 2.1 | -0.5 | -1.2 | 1.3 | 1.7 | -2.6 | -1.4 | |
Utilities | -4.6 | 0.1 | -0.9 | -5.0 | -0.2 | 0.4 | -0.9 | -7.6 | |
Total industry | -0.4 | 0.0 | -1.6 | -3.5 | -1.9 | -1.4 | -0.9 | -6.2 | |
Commerce | 0.7 | 0.3 | -3.4 | -4.6 | -2.5 | -2.6 | -1.2 | -8.9 | |
Transport | 1.0 | -0.4 | -3.6 | -2.3 | -2.0 | -1.7 | 2.1 | -6.5 | |
Communications | 0.7 | 0.9 | 0.7 | -2.2 | -0.7 | -0.9 | 4.7 | -0.3 | |
Finance | -0.2 | 0.5 | 0.2 | -0.4 | 0.1 | -0.2 | 0.4 | 0.2 | |
Other | 0.4 | 0.9 | -0.8 | 0.3 | -0.1 | 0.5 | 0.9 | 0.3 | |
Real estate | -0.3 | -0.1 | -0.5 | -1.0 | -1.8 | -1.2 | 0.4 | -2.8 | |
Health care and education | 0.4 | 0.0 | -1.5 | 1.6 | 0.8 | -2.0 | -0.1 | 0.0 | |
Total services | 0.2 | 0.1 | -1.0 | -1.1 | -1.1 | -1.4 | 0.4 | -2.7 | |
Value added | 0.0 | 0.0 | -0.3 | -2.1 | -1.4 | -1.3 | 0.1 | -3.3 | |
GDP | -0.1 | 0.1 | -0.8 | -2.1 | -1.7 | -1.4 | 0.1 | -3.8 | |
Private consumption | 0.1 | 1.2 | -2.1 | -2.2 | -1.5 | -1.3 | 1.3 | -4.0 | |
Public consumption | 0.6 | -0.6 | -0.7 | 0.4 | 0.3 | -2.9 | 1.2 | -1.0 | |
Fixed investment | -2.3 | -0.9 | -3.2 | -7.4 | -4.4 | -4.9 | -4.5 | -14.1 | |
Exports | 3.4 | -11.5 | 13.6 | 3.1 | -2.4 | -0.4 | -1.1 | 6.1 | |
Source: Brazilian Institute of Geography and Statistics (IBGE) | |||||||||
On the business side, investors are suffering the effects of the crisis from different angles: the cost of doing business in Brazil is very high because of relatively high salaries, taxes and contributions to the government, and the cost of corruption. In the short term, the depreciation of the currency is increasing costs of imported inputs and therefore the ability of manufacturers to produce. In the longer term, this should help not only the competitiveness of exports but also put local producers that serve the domestic market in a better position to compete with imported goods.
Corruption scandals and political paralysis are hurting business sentiment and investors are very sceptical about the ability of this administration to fix the economy, leading to investment decisions being postponed.
After serious mismanagement of public finances, the government was not in a position to help the economy during 2015; exports expanded over 6% while imports contracted significantly, in part, due to a sizeable depreciation of the exchange rate.
Manufacturing and commerce sectors led the decline
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From a supply perspective the sectors that led the decline were manufacturing, commerce, and construction. Manufacturing was heavily influenced by the poor performance of the automotive sector and electronics and appliances: these activities had to put up with the withdrawal of subsidies and tax breaks which ended in 2015. In addition, demand in the automotive sector was negatively affected because of higher prices caused by safety and environmental regulations stating that vehicles had to use better equipment. In general, demand for durable goods and commerce activities decreased due to the aforementioned factors impairing private consumption. The significant drop in construction is partially explained by the unveiling of corruption scandals linked directly to construction companies, many of which were banned from doing business with the government.
Outlook and implications
The corruption scandals and the political crisis will make the recession longer and deeper. The political gridlock and the increased likelihood of an impeachment to President Dilma Rousseff are further complicating the ability of the government to stabilise the economy. Inflation remains very high and the fiscal deficit is huge and is still growing. The government needs support to take austerity measures but this is difficult because corruption scandals have reached the highest spheres of the political class. The lack of co-operation among political players does not only centre on populism but also on the individual agendas of some politicians, who want to use their power and support towards the government to avoid being involved in accusations of corruption. Meanwhile, economic policymakers cannot get the support to implement measures aimed at fixing the most urgent economic problem: the widening fiscal deficit
The confidence crisis will prevent investment. Sentiment and activity surveys such as the business confidence index and purchasing managers' index (PMI) point to poor investment in the near future. In February, the manufacturing PMI was 44.5, which marked the 13th consecutive month the index remained in the below-50 contractionary territory; this signals the recession in the industrial sector is far from over. The outlook for Brazilian industry is very dark, construction is not showing any improvement and the situation has worsened due to the Petrobras corruption scandal which involves important construction companies. The service PMI amounted to 36 in February and this is the lowest reading in the survey's nine-year history.
Seasonally adjusted data reveal that the drop in GDP during October–December was 1.4%, less severe than the decline of 1.7% posted in the third quarter and also lower than the 2.1% drop that GDP suffered in the second quarter of 2015. Although the economy continues to deteriorate there is a softening trend; PMI numbers suggested the same pattern through January 2016 but February's reading has been very poor. In IHS's latest forecast we estimate that Brazil's economy will further deteriorate though mid-2016 and then stabilise at very low levels, but we do not expect any significant recovery until 2019. It seems unlikely that any significant change in macroeconomic management will take place during this administration. A presidential election will be held in October 2018 and a new administration will take power in January 2019. Our forecast calls for GDP to decline 3.7% in 2016 before inching up 0.6% in 2017.