Brazil: GDP contraction eases in Q2 but Brazil remains in recession
August 31, 2016
The deep recession plaguing Latin America’s largest economy continued in the second quarter of the year, although the economy improved compared to the previous period. GDP fell 3.8% over the same quarter of the previous year in Q2, as low commodity prices, rising unemployment and political turmoil over the Petrobras scandal and President Dilma Rousseff’s impeachment process hampered the economy. Nevertheless, the reading marked an improvement from Q1’s steeper 5.4% fall and represented the softest contraction in a year, almost meeting market expectations of a marginally softer 3.7% decline. Softer contractions in private consumption and fixed investment were mainly behind the improvement, whereas public spending and the external sector deteriorated.
Taking a closer look at the domestic side of the economy, private consumption recorded another large drop in the second quarter, falling 5.0% after the 6.3% contraction in Q1, as households’ spending power has suffered from high inflation and rising unemployment. Government consumption fell 2.2% (Q1: -1.4% year-on-year), as the public accounts have been depleted by low tax revenues. However, political turmoil has delayed a much-needed fiscal adjustment as politics took central stage amid former President Dilma Rousseff’s impeachment proceedings. Fixed investment fell 8.8%, which was a much softer contraction than Q1’s severe 17.5% decrease. While low levels of business confidence and political uncertainty continued to drag on investment, Q2’s softer contraction mainly reflected a gradual restoration in investor confidence along with the positive impact of the Olympics on investment.
The external side of the economy performed poorly. Growth in exports of goods and services slowed notably from Q1’s outstanding 13.0% to 4.3% in Q2, reflecting the adverse impact of sluggish global trade and an appreciating real. Meanwhile, imports fell 10.6% in Q2, which was still softer than Q1’s record-plunge of 21.7%. Subdued demand has been dragging on imports in recent quarters, but an increase in Olympic-related demand and improving investment likely caused imports to decrease much less than in the previous quarter.
On a quarterly basis, the economy contracted 0.6%, which was a deterioration over the 0.4% drop recorded in Q1.
While Q2’s data confirm that the economy remains stuck into deep recession, the fact that the contraction eased for a second consecutive quarter suggests that Brazil might have embarked on a lengthy road to recovery. The removal of Dilma Rousseff from the presidency on 31 August will likely stabilize the political situation and pave the way for much-needed economic reforms. Nevertheless, new President Michel Temer and the government have a tough road ahead to restore fiscal sustainability, reform the pension system and revive growth.