Brazil: Economic recovery takes off in Q3
December 1, 2017
Recently released GDP data confirmed that the long-awaited recovery has taken off in the crippled Brazilian economy. GDP rose 1.4% annually in Q3, the largest expansion since Q1 2014. The result followed Q2’s revised 0.4% increase (previously reported: +0.3% year-on-year), which had marked the first positive reading in over three years. The figure, which slightly exceeded analysts’ projections of a 1.3% increase, is a positive sign for the Brazilian economy; the economy is coming out of the worst recession in the country’s recent history. It remains to be seen, however, if a strong recovery can take hold, as political uncertainty in the run-up to the 2018 elections is high, and the country is faced with severe macroeconomic imbalances that need to be addressed.
Q3’s acceleration was driven chiefly by improved dynamics in the domestic economy. Household spending grew 2.2% annually in Q3, the best reading since Q4 2014 (Q2: +0.6% yoy). The government’s decision to allow workers to make early withdrawals from an employee severance fund in Q2 likely continued to shore up spending, along with an improving labor market. In addition, the steep contraction in fixed investment waned noticeably in Q3. Fixed investment fell a moderate 0.5%, notably above Q2’s 6.7% decline, as low interest rates, improving business confidence, and efforts to privatize airports and highways paid off. Meanwhile, government consumption fell 0.6% in Q3 (Q2: -0.8% yoy).
On the external side, improving demand, higher commodities prices and robust agricultural output boosted overseas sales in the third quarter. Exports grew at a robust pace of 7.6% annually in Q3 (Q2: +2.5% yoy), the best result since Q1 2016. Imports also turned around, reflecting resurging domestic demand (Q3: +5.7% yoy; Q2: -3.2% yoy).
On a quarterly basis, GDP expanded a seasonally-adjusted 0.1%, below Q2’s 0.7% quarter-on-quarter rise.
All-in-all, the third quarter GDP release signals that the Brazilian economy has embarked on a firm recovery path. Given the severity of the recession and the number of challenges still facing the economy, however, the recovery is likely to be unspectacular overall. Amid a highly turbulent political scene and upcoming elections, several structural reforms still need to be passed to correct macroeconomic imbalances and put government finances on a stronger path.