Economic Analysis - Political Uncertainty Will Constrain Recovery - DEC 2017

BMI View : Brazil will exit recession in 2017 and grow modestly in 2018, driven by a cyclical recovery of private consumption and stronger exports. Nonetheless, investment will remain on the sideline due to political uncertainty, limiting growth over the medium term.

Brazil will see a modest acceleration in economic activity growth over the coming quarters, as a cyclical recovery of private consumption and export growth pull the economy out of recession. Nonetheless, fiscal consolidation efforts will undermine public consumption and uncertainty over the outlook for labour and pension reforms will keep major investment on the sidelines, constraining growth. The upcoming election campaign is likely to drive volatile shifts in business sentiment, as the likelihood of a competitive anti-establishment presidential candidate will threaten the durability of reforms initiated over the last year.

We maintain our real GDP growth forecasts at 0.4% in 2017 and 1.7% in 2018 ( see 'Recovery Looks More Cyclical Than Structural', June 30). Our forecasts are slightly more downbeat than Bloomberg consensus, which stands at 0.6% and 2.2%, respectively, reflecting a more subdued investment outlook in light of significant political uncertainty. In Q217, real GDP expanded 0.3% y-o-y, led by exports and private consumption, while investment remained in a deep contraction, falling 6.5%. Monthly economic activity has been choppy, contracting in three of the first seven months of the year but growing 1.4% y-o-y in July.

Recovery Getting Underway
Brazil - Monthly Economic Activity, % y-o-y
Note: Blue line denotes 6mma. Source: BCB, BMI

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