Brazil: Solid domestic demand underpins strong GDP outturn in Q3
The economy continued to strengthen in the third quarter, with GDP growing at the quickest clip since Q1 2018. Seasonally-adjusted GDP increased 0.6% quarter-on-quarter in Q3, a notch above Q2’s revised 0.5% expansion (previously reported: +0.4% quarter-on-quarter) and exceeding market expectations of 0.4% growth. On an annual basis, GDP growth clocked in at 1.2% in Q3, up from Q2’s revised 1.1% expansion (previously reported: +1.0% year-on-year).
Robust consumer spending, which hit an over one-year high in the third quarter (Q3: +0.8% quarter-on-quarter; Q2: +0.2% qoq), spearheaded the acceleration. Meanwhile, fixed investment expanded at a healthy rate of 2.0%, albeit softening from Q2’s 3.0% rebound, and was supported by the recovery in industrial activity during the quarter and more accommodative monetary conditions. On the other hand, government consumption fell 0.4% in Q3, following Q2’s 0.3% contraction amid tight public finances.
With regards to the external sector, waning demand from Brazil’s key trading partners, particularly Argentina and China, in tandem with ongoing difficulties for mining giant Vale after a dam collapsed earlier this year, weighed on foreign shipments. Exports of goods and services declined 2.8% in Q3, worsening from the 2.0% contraction in Q2. Conversely, growth in imports of goods and services notably accelerated in the third quarter (Q3: +2.9% qoq; Q2: +0.7% qoq). As a result, net trade dragged on growth in Q3.
Turning to next year, the economy should continue to gain momentum, supported by robust domestic demand. Brisk household spending, lower borrowing costs and a continued recovery in industrial activity will boost growth. Moreover, the external sector should rebound due to an improving global trade backdrop. That said, a depressed Argentine economy will likely limit external demand, while recent government proposals to curb public spending suggests government consumption will continue to drag on growth.
Commenting on the outlook, Gustavo Rangel, chief economist for Latin America at ING, noted:
“The yet-to-be-seen impact of the monetary stimulus, which affects consumption after a significant time-lag, should be the critical driver behind the acceleration in economic activity over the coming quarters. As seen in the 3Q GDP report, renewed evidence of the steady recovery in the construction sector, a key credit-sensitive and labour-intensive sector, bodes especially well for a faster recovery. External demand, along with the persistent fiscal contraction, should remain important headwinds […] Given that prospects for a recovery in Argentina remain remote, this should contribute to weigh down industrial exports throughout 2020, especially in the auto sector.”