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Same-Day Analysis
Q1 Drop in Brazil's GDP Milder than Expected
Published: 6/10/2009
IHS Global Insight Perspective | |
Significance | On a seasonally adjusted basis, Brazilian GDP in the first quarter of 2009 fell 0.8% with respect to the last quarter of 2008, while raw data show that real GDP contracted 1.8% year-on-year. |
Implications | The decline in GDP was less severe than IHS Global Insight's estimate and also the consensus; markets have reacted very well to the news, because it is now more likely that the recession will come to an end sooner rather than later. The major drivers of the drop in GDP were external demand and investment. |
Outlook | The outlook for the Brazilian economy is one of improvement quarter-on-quarter, and this may happen as soon as the second quarter of the year; still, the economy is coming out of very low levels and we forecast economic growth for the full year at -1.0%. |
GDP fell for the second consecutive quarter in the first quarter of 2009, making the recession in Brazil "official". After falling 3.6% (quarter–on-quarter, q/q) in the fourth quarter of 2008, economic activity declined 0.8% q/q in the first quarter of 2009. While growth remains in negative territory, the size of the drop is nevertheless good news as IHS Global Insight was expecting a sharper decline.
Fixed Investment Plummets
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Also known as capital expenditure, fixed investment plunged 12.6% q/q this quarter after falling 9.6% q/q in the last three months of 2008. In the yearly comparison, investment fell 14.0% when compared to January–March 2008 as foreign direct investment dropped significantly. The global recession has damaged business sentiment and, despite relative optimism on emerging markets and with particular regard to the Brazilian economy, foreign investors have taken a very cautious approach and postponed investment projects. Government efforts to keep the economy afloat have been successful on the consumption side; nonetheless, despite strong growth in public investment, these were not enough to offset the freefall of private capital expenditures.
Private Consumption Resumes Positive Growth
After falling in October–December 2008, growth in private consumption returned to positive territory, encouraged by government support in the form of tax breaks for consumption of durable goods such as automobiles and appliances, and also by the availability of credit-designated lines at relatively lower interest rates. Government consumption also expanded as part of the fiscal stimulus programme. The stimulus is not restricted to direct purchases by the government but also includes higher payroll expenditure: in January–April, the civil-service payroll jumped almost 20% (after discounting for inflation). As expected, and already reported in the balance of payments, exports (volume) declined significantly as—driven by the global recession—world demand for Brazilian products plummeted, particularly from large economies such as the United States, Europe, and Japan. Brazil's consumption of imported goods also declined in tune with exports. In addition to the domestic economic slowdown, the depreciation of the Brazilian currency helped to reduce purchases of imported goods.
Outlook and Implications
The second-quarter figures will bring positive news as GDP growth should return to positive territory; aggressive fiscal stimulus coupled with monetary easing by the Central Bank of Brazil (that is, lower interest rates coupled with higher liquidity and credit availability) will help growth in private consumption as well as public investment. According to the Confederação Nacional da Indústria (National Industry Confederation), business sentiment started recovering in the first quarter of 2009 after plunging in the second half of 2008. Labour market indicators are also positive, as the economy appears to be creating jobs after the sharp decline registered in November 2008–January 2009. The unemployment rate is higher than in early 2008, but significantly lower than in 2007. While the outlook for Brazil is positive, poor external demand will continue to be a constraint on rapid growth in the country; in addition the economy will have to continue to grow without further aid from the government. On a very positive note, the central bank may not need to increase interest rates, since they were very high when the crisis started and, for the first time in many years, the targeted SELIC rate may be in single digits this week after the bank's monetary policy committee meets today and reviews the rate. IHS Global Insight now forecasts GDP to fall 1% in full-year 2009, and then expects positive growth of 3.9% and 5.5% in 2010 and 2011 respectively.Most Viewed Articles
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