Brazil: Economy grows for the first time since Q1 2014
September 1, 2017
Recently-released GDP data confirms that the battered Brazilian economy has entered a tentative recovery phase. GDP rose 0.3% annually in Q2, the first positive reading in over three years and a notable contrast to the 0.4% contraction recorded in Q1. The figure exceeded analysts’ projections. Although the result is positive for the Brazilian economy, it remains to be seen whether a strong recovery will take hold as political uncertainty remains high.
The economy’s upturn was driven by a rise in consumer spending. Private consumption grew 0.7% annually, the best result since Q4 2014. Falling inflation is helping underpin real disposable income, while the government’s decision to allow workers to make early withdrawals from the employee severance fund, a scheme in place since 1994 that is known by its acronym “FGTS", also likely boosted the result. Outside of household consumption, the other components of domestic demand remained in freefall. Government spending dropped 2.4% in Q2, a multi-year low, and fixed investment plunged 6.5% (Q1: -3.7% year-on-year). The government continues to grapple with a large fiscal deficit and budget shortfalls, while the still-bleak economic panorama and large debt loads are likely behind the lack of investment.
On the external side, improving demand and stabilizing commodities prices boosted overseas sales. Exports grew at a robust pace of 2.5% annually in Q2 (Q1: +1.9% yoy). Meanwhile, imports dropped 3.3%, reflecting the weakness of the domestic economy and falling investment.
On a quarterly basis, GDP expanded a seasonally-adjusted 0.2%, the second consecutive quarter of growth, meaning the economy exited technical recession (Q1: +1.0% quarter-on-quarter).
Although the second-quarter GDP release points to improvements in the Brazilian economy, conditions remain discouraging. The unemployment rate continues to rest in double-digits, and falling investment shows no signs of bottoming out. Moreover, political noise worsened in Q3 as corruption allegations against President Michel Temer were in the spotlight. The turbulence is likely to continue holding back investment activity and prevent a stronger recovery from taking hold, as the trajectory for government reforms has become more uncertain in the wake of Temer’s abysmal approval ratings.