GDP per capita in Brazil

Brazil - GDP per capita (U.S. Dollars)

Economy turns corner in Q1

Recent GDP data confirm that the economy is entering a recovery phase after a perfect storm of high unemployment, tight credit conditions and political turmoil held Latin America’s largest economy in the deepest recession on record. GDP fell 0.4% over the same period last year in Q1, slightly worse than FocusEconomics analysts’ expectations. The result was a notable improvement from Q4 2016’s 2.5% decrease and marked the best result since Q4 2014. Moreover, the economy returned to growth on a quarterly basis, expanding 1.0% (Q4 2016: -0.5% quarter-on-quarter).

Despite the positive headline figure, conditions remain weak in Brazil’s economy. All components of domestic demand recorded contractions, although private consumption and fixed investment fell at a more moderate pace than the previous period. High unemployment has weighed on household spending, although easing inflation and improved confidence have provided some respite and private consumption fell 1.9% annually, the smallest decline since Q2 2015. The fall in fixed investment also eased slightly from a sharp 5.4% contraction in Q4 2016 to a 3.7% decline in Q1. Meanwhile, government consumption fell 1.3% as austerity measures dampen spending.

On the external side, a record harvest of soybeans along with higher commodities prices and an improving global backdrop boosted overseas sales and exports swung from a 7.6% fall in Q4 to 1.9% growth. However, soaring imports caused the external sector to subtract from growth as imports rose 9.8%.

While overall the result bodes well for Brazil’s economy, recent political turmoil is threatening to undermine the recovery and is casting a shadow on the country’s outlook. The government has been rocked by a political scandal after a local newspaper reported that President Michel Temer was recorded discussing and approving illegal bribes to jailed politician Eduardo Cunha. The reports have led to mass protests and eroded Temer’s political support and are jeopardizing much needed political reforms.

Despite the highly uncertain environment, the economy is expected to return to growth this year and LatinFocus Consensus Forecast panelists see GDP expanding 0.6% in 2017, which is up 0.1 percentage points from last month’s estimate. However, downside risks to our forecasts have risen in recent weeks and panelists are still factoring in the latest developments. For 2018, the panel sees the economy growing 2.4%.