Brazil GDP Q1 2016


Brazil lingers in recession, although GDP contraction moderates in Q1

The deep recession plaguing Latin America’s largest economy continued in the first quarter of the year although the economy did improve compared to the previous period. GDP tumbled a significant 5.4% over the same quarter of the previous year in Q1, as rising unemployment and political turmoil hampered the economy. However, the reading was an improvement from Q4’s 5.9% fall—the largest contraction since the modern data series began in 1996. In addition, the result was above market expectations of a sharper drop. The improvement was broad-based across the economy, however, the state of domestic demand in Brazil remains abysmal.

Private consumption recorded another large drop in the first quarter, falling 6.3% after contracting 6.8% in Q4. Households’ spending power has suffered from high inflation and a weak real as well as elevated unemployment levels. Government consumption fell 1.4% (Q4: -2.9% year-on-year). Government accounts have been squeezed by low tax revenues, however, political turmoil delayed a much-needed fiscal adjustment in the first quarter as politics took central stage amid suspended President Dilma Rousseff’s impeachment proceedings. Fixed investment plunged 17.5%, which followed Q4’s 18.5% drop, due to low levels of business confidence and political uncertainty.

On the external side of the economy, the picture was brighter. Growth in exports of goods and services picked up from 12.6% in Q4 to 13.0% in Q1, which marked the best result since Q4 2010. Despite a slump in global trade, a weak value of the real is supporting Brazilian exports. Meanwhile, subdued demand caused imports to plummet 21.7% in Q1, the largest contraction in recent history (Q4: -20.1% yoy).

On a quarterly basis, the economy contracted 0.3%, which was an improvement from the 1.3% drop recorded in Q4.

Although the economy took baby steps toward an improvement in the first quarter, a stable political situation and much-needed government reforms will be key to bringing about a sustained recovery going forward. In May, Vice President Michel Temer took the reins of Brazil’s economy after Rousseff was forced to temporarily step down from her post as president amid the ongoing impeachment proceedings. Although market analysts were upbeat about Temer assuming the role of president, a change in leadership is not a magic bullet for Brazil’s economy and it remains to be seen if Temer’s government will be able to spur growth. Cassiana Fenandez, Brazil Chief Economist at JPMorgan comments:

“The government's ability to overcome the political instability is, in our view, key to gathering the support needed in Congress to move forward with a market friendly economic agenda, necessary to sustain upward momentum in market sentiment. In other words, we need to see a stronger rebound in confidence before anticipating a more consistent economic recovery. For now, manufacturing confidence, despite showing early signs of improvement, is still lagging behind in comparison with other recessionary periods, and we foresee growth stabilization only at this year's fourth quarter.”

Brazil’s outlook is grim. The economy is expected to record another deep contraction this year. LatinFocus Consensus Forecast panelists expect the economy to contract 3.7% in 2016, which is unchanged from last month’s estimate. For 2017, the panel sees the economy growing 0.7%.

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Brazil GDP Chart

Brazil GDP Q1 2016

Note: Quarter-on-quarter changes of seasonally adjusted GDP and year-on-year variation in %
Source: Brazilian Institute of Statistics and Geography (IBGE) and FocusEconomics Consensus Forecast.

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