Weaker Growth Prospects In H213
While Q213 real GDP growth for Brazil surprised to the upside at 3.3% year-on-year (y-o-y), as compared to survey estimates of 2.6% y-o-y, we maintain our view that slower growth is ahead in H213 ( see 'Significant Headwinds To Weigh On Growth In 2013 And 2014', August 14 ) . This is underpinned by weakening high frequency data for the manufacturing sector, as well as our view that the consumer will remain unde r pressure on the back of rising interest rates, a weak real , and still-elevated consumer price inflation . That said, we acknowledge upside risks to our 2013 real GDP growth forecast of 2.0% stemming from the robust Q213 growth print .
Strong Q2 real GDP growth was driven by a pick-up in fixed investment and stronger exports, which expanded by 6.3% y-o-y after contracting by 5.7% y-o-y in Q113 on the back of falling metals prices and delays in getting agricultural exports to market. While robust fixed investment growth, in particular, is a positive sign, our Infrastructure team remains sceptical that we will see a substantial uptick in construction industry growth this year, as the impacts from the government's PAC II growth acceleration programme have been minimal thus far, and regulatory changes affecting the country's infrastructure concessions programme are likely to keep foreign investors wary of investing in Brazil ( see 'Growth Revised Down As Government Gets In The Way Of Potential', July 26).
We believe a number of factors will weigh on economic activity in the latter half of this year, including high inflation, weak consumer sentiment, and growing signs that the manufacturing sector's recovery is faltering ( see 'High Frequency Data Indicates Faltering Economic Recovery', August 7). Recent data reinforces this view, as the services, manufacturing and composite purchasing managers' index (PMI) readings for August came in below 50 for the first time since July 2012, indicating that Brazil's economic recovery is slowing. Moreover, with PMI data having remained in a downtrend since January, we believe a significant positive shock to the economy would be necessary to break the trend. Similarly, although industrial production growth remained in positive territory in July at 2.0% y-o-y, growth has been erratic in recent months, and gains in industrial capacity utilisation appear to have stalled.
|Pace Of Recovery Will Not Be Sustained|
|Brazil - Real GDP Growth & Expenditure Breakdown, % chg y-o-y|