The Brazilian economy grew 0.3% in the last quarter of 2011 compared to the July-September period; although this is an improvement on the slight decline posted in the third quarter, the rate of expansion is sluggish for an emerging economy.
IHS Global Insight Perspective | |
Significance | Seasonally adjusted data show that GDP in Brazil increased 0.3% in the fourth quarter of last year compared to the previous quarter. In full-year 2011 the Brazilian economy expanded at a modest 2.7%; this is well below regional peers and is also inferior to growth seen in China and India. |
Implications | Fourth-quarter data show the Brazilian economy accelerating and moving back to positive growth; the annual data portray an economy moving without the help of fiscal and monetary stimuli and adjusting after very fast growth in the previous year. In addition sluggish growth was driven by almost flat output in an industry challenged by the appreciation of the local currency, which reduced competitiveness. |
Outlook | Our latest forecast calls for GDP to expand in the 3.0-3.5% range, driven by acceleration in investments and by a less restrictive monetary policy (lower interest rates). Major risks to this forecast are the possibility of another US recession, a hard landing in China, and a domestic credit bubble. |
Sluggish Growth in Q4
Seasonally adjusted data show that GDP increased 0.3% (quarter-on-quarter, q/q/) in the fourth quarter of 2011 compared to the previous quarter. Growth in services (up 0.6% q/q) and agriculture (up 0.9% q/q) was partially offset by a drop in industry growth (down 0.5% q/q). All sub-sectors within industry posted positive growth except manufacturing, which declined 2.5%, in part hurt by a strong local currency that not only diminished the competitiveness of Brazilian exports but also challenged domestic producers by making imports cheaper. On a positive note construction and mining posted relatively strong expansions on the quarterly comparison, up 0.8% and 1.8% respectively. The energy sector—included in mining—remains a key driver of growth for the Brazilian economy. In the service sector, commerce returned to positive growth after declining in the third quarter last year when private consumption went down, mostly influenced by the adverse international environment, which darkened the outlook for Brazil. The real estate and financial sub-sectors remained on moderate-to-strong growth, and all other service categories posted moderate positive growth as well. From a demand perspective, private and public consumption as well as investment returned to positive growth after declining in the third quarter; meanwhile, exports continued to expand strongly, but this just shows the continued recovery over the sharp drop registered in the first quarter of last year and does not necessarily indicate increased demand from abroad.
2011: The Year in Perspective
In 2011, Brazil's GDP expanded 2.7%—a very modest growth rate for an emerging economy: Latin America grew at 4.0%, while China and India expanded 9.2% and 6.8%, respectively, and Russia's GDP was up 4.3%. Last year the Brazilian economy faced several challenges: not only did it need to maintain the momentum of 2010—when it had grown 7.5%—but the country had to deal with exacerbated inflationary pressures that came in the form of an external supply shocks—the rally of commodity prices in international markets, in particular agricultural and food-related commodities—and from the overheating of the domestic economy. The response from authorities was to slow down the pace of fiscal spending as well as to make monetary policy more restrictive by increasing interest rates. These measures, coupled with a less favourable international environment—where other emerging economies such as China and India were slowing down, Europe was moving into recession, and the US was full of uncertainties, especially in the second half of the year when the probability of a second recession increased to 40%—were the major drivers of the deceleration registered in Brazil, particularly in the second half. Manufacturing in Brazil has underperformed as, in addition to the aforementioned factors, it was hurt by the appreciation of the local currency and thus by foreign competition and also because in 2010, the base of comparison, it was directly helped by the government through subsidies and tax breaks, which increased demand and pushed up production.
Outlook and Implications
The Central Bank of Brazil started relaxing monetary policy in August 2011 in an effort to help the so-called "real" sector of the economy (production). Since then it has cut the policy rate four times in as many meetings, bringing down the rate from 12.50% to 10.50%. The bank will meet again today (7 March) and we expect it to slash the rate by another 50 basis points. The positive effects of lower interest rates should start kicking in as early as this quarter given that there is usually a lag of two to four quarters between rate cuts and increased investment and consumption. In terms of fiscal policy there are no plans to boost spending to help the economy; the plan is to balance better economic policy by lowering interest rates while behaving prudently on the fiscal side, so that public finances improve and eventually reduce the tax burden (see Brazil: 14 December 2011: Brazil's Opportunity to Fix an Unbalanced Economic Policy Mix ).
Brazil's industry has already shown positive signs of recovery: industrial production returned to positive (albeit modest) growth in November 2011 and in December it accelerated to a strong pace. Meanwhile, the purchasing managers index (PMI) moved into expansion territory in January after seven months of contraction. This is very good news as manufacturing was the underperformer in 2011 (see Brazil: 2 March 2012: Brazil's PMI Remains in Expansion Territory).
On the external front, IHS Global Insight's baseline scenario calls for a soft landing in China, a mild recession in Europe, and the acceleration of growth in the US economy. This scenario does not impose major restrictions for a moderate expansion in Brazil; commodity prices will continue to move sideways so export revenue will not be hampered. Foreign direct investment will continue to flow into the country as investors remain bullish on the long-term prospects of the country.
The major driver for growth over the next two years will be investment as the country prepares for the football World Cup in 2014 and infrastructure is built and enhanced. Brazil will also host the summer Olympic Games in 2016, thus momentum will be maintained until then, at least. Our latest forecast calls for GDP to expand in the 3.0-3.5% range, driven by acceleration in investments and by a less restrictive monetary policy (lower interest rates), before accelerating to 5.0% in 2013.