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Investment could boost medium-term prospects

Brazil’s GDP increased by 0.2% on the quarter in Q1, leaving output just 1.9% higher than a year earlier. Were it not for the strong performance of public consumption and the accumulation of stocks, the economy would have contracted in Q1. As a result, we now expect GDP growth of 1.4% for 2014 as a whole.

The central bank decided to pause its rate hike cycle in May 2014 — leaving the Selic rate at 11% — even though inflation remains close to the upper limit of the target range. High interest rates will weigh on domestic demand, but a recovery in exports should lift growth toward 2% next year.

Over the medium term, Brazil needs to tackle its relatively high government budget deficit and current account imbalance, in order to attract more investment and improve its credit rating. But Brazil has a large, well educated population. By 2022, we expect more than 17 million Brazilian households to have an income of more than US$35,000, up from around 10 million in 2012. This increasing prosperity will help to boost growth above 3% by 2017. If Brazil is able to improve its infrastructure, expand its  manufacturing sector and raise its productivity, growth could well exceed 3.5% over the medium term.

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