Brazil’s Economy To Rebound In 2013, But No Return To Boom Years

We recently downgraded our 2012 real GDP growth estimate for Brazil to 1.0% from 1.5% previously, as Q3 2012 growth data indicates that the economic recovery is progressing more slowly than we expected. Both fixed investment underperformance and slimmer profit margins for the banking sector, due to government pressure on commercial banks to reduce lending rates, have long been themes in our analysis, though they weighed on economic activity more significantly than we were expecting in the third quarter of last year.

Although growth looks set to come in at the weakest level since the 2009 recession in 2012, we continue to anticipate a significant pickup in economic activity in 2013. We forecast real GDP expansion of 3.5%, as we expect a construction backlog to bolster growth, and continued stimulus measures to modestly boost activity in the consumer and manufacturing sectors.

Over the medium term, we believe that slowing private consumption growth and the end of the China-led commodity boom will constrain Brazil’s average real GDP growth to 3.5% between 2012 and 2017. Indeed, we believe that Brazil’s consumer story is in for a period of more moderate growth in the next few years due to reduced consumer purchasing power, on the back of continued currency weakness, and high household indebtedness.

In addition, we foresee a supportive, but bifurcated, investment picture going forward. While a massive growth acceleration programme and significant commodity wealth will continue to support one of the region’s largest infrastructure project pipelines, our view of China’s economy to rebalance has important implications for Brazil. As Chinese investment comes off the boil, we anticipate that the slowdown in economic activity will feed through to lower average prices for base metals and iron ore, squeezing firms’ margins and forcing them to re-evaluate their capital expenditure programmes in major commodity-producing countries. As such, we expect that investment inflows related to the commodity sector are likely to moderate, feeding through to slower economic growth in Brazil overall.

Full analysis of the Brazilian economy is available to subscribers at Business Monitor Online.