Economic Analysis - Investment Key To Modest Recovery - JUNE 2017

BMI View : The Brazilian economy will grow modestly in 2017, emerging from a nearly three-year recession as business sentiment improves, driving investment. That said, the recovery will remain tepid as structural improvements remain subject to considerable political risk.

Brazil's economy will expand in 2017, exiting a recession that began in Q414. Although growth remains negative, the economy has bottomed and business sentiment is improving as inflation falls, interest rates are slashed and the government pursues structural reforms. Investment will pick up over the coming quarters, gradually filling the country's output gap. With the worst of job losses likely passed, unemployment will plateau and consumer confidence will improve, supporting consumption.

While our view is fundamentally unchanged, we have downwardly revised our forecast for real GDP growth in 2017 to 0.5%, from 0.8% previously ( see 'Improving Business Sentiment Will Drive Modest Recovery', January 5). Reform momentum is being sapped by the push to enact pension reform ( see 'Focus Turns Toward Pension Reforms', March 29), a key component of fiscal consolidation efforts. This will likely delay or inhibit labour and sector reforms that businesses have been expecting. As a result, we have lowered our expectations for fixed investment growth.

Activity Growth Set To Turn Modestly Positive
Brazil - Monthly Economic Activity Index, % y-o-y
Note: Line denotes 6mma; Source: IGBE, BMI

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