Less impetus from household spending
After growing by just 0.9% in 2012, Brazil’s economy exceeded expectations by rising 1.5% on the quarter in Q2, following a 0.6% increase in Q1. This has prompted us to raise our forecast for 2013 GDP growth to 2.6%, up from the 2.4% envisaged three months ago. However, the pickup in Q2 could be short-lived as tighter policy will constrain activity.
Brazil remains hobbled by low growth and volatile inflation. Despite the Government’s attempts to keep controlled prices at bay, overall inflation is still close to the ceiling of the central bank’s 4.5% +/-2% target. The central bank is expected to raise the Selic rate to 9.75% by the end of 2013.
We have observed a slowdown in consumer spending. This is mainly because, while real incomes grew significantly between 2000 and 2007, private credit surged and these consumers are now in the process of paying off debts. But in the longer term, reducing debt levels should enable a new cycle of stronger consumption growth.
The social unrest seen earlier this year has now calmed down. It is now seen as more of a reaction to corruption and misspending by the Government than a protest over economic issues. All of next year’s presidential candidates have an incentive to promote reform, which could lead Brazil back toward 3.5% growth. If the country is able to improve its business environment and invest more in infrastructure, annual growth could hit 4%.
Contributions to GDP growth
Source: Oxford Economics.
Prices and earnings
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