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Our Blog

Brazil in the spotlight

09 August 2016
Brazil, economy, emerging, markets, Olympics, Rio
Brazil will be in the spotlight for the next couple of weeks as the spectacle that is the Olympics unfolds. Of course Brazil has already been under the spotlight for a while as one of the worst performing emerging economies over the last couple of years.
 
Recent activity data, no doubt helped by the Olympics, suggests the worst may be over for the economy. The manufacturing PMI is improving, though remains in contractionary territory, and annual growth in industrial production has improved from -13.5% in January to -6.0% in June. Not great, but heading in the right direction.


Inflation appears to have passed its peak. Higher food prices are expected to keep headline inflation elevated in the near-term, but medium-term inflation dynamics have improved. In particular, the output gap has widened, though that mostly reflects the significant deterioration in the labour market as the unemployment rate has risen from a low of 4.6% in December 2014 to 11.2% now. Also helping the inflation story is the recent trend lower in inflation expectations.
 
The monetary policy interest rate (the Selic rate) is currently at 14.25%, but the improved inflation outlook should create room for interest rate cuts either late this year or early next year.
 
While monetary policy looks set to remain contractionary in the near term, so too does fiscal policy. The Government, under interim president Michel Temer, appears committed to closing the primary budget deficit. The Government is targeting a fiscal of deficit of -2.1% of GDP in 2017, up from a likely deficit of around -3.0% of GDP in 2016.
 
It appears GDP is near the trough in the cycle – we believe June may well be the last quarter of contraction - with a period of consolidation likely to follow before a modest recovery begins. The recovery will be constrained by still high interest rates, fiscal consolidation and the low terms of trade. We are forecasting annual average growth of -3.0% in 2016, following the -3.8% recorded in 2015. Modest growth of around 1.0% is expected in 2017. That makes the recovery more of a bronze than gold medal effort.

 
Politics has also been centre-stage in Brazil recently with the impending impeachment trial of President Dilma Rousseff scheduled for the end of August or early September.  
 
Expectations are high that Temer, who will assume the presidency for the remainder of the term if Rousseff is impeached, will get the budget deficit under control and will have sufficient support to press ahead with necessary structural reform. This is likely behind the solid performance of the Brazilian share market recently with the index up 54% since the January low. A word of warning is that structural reform takes time to impact on the real economy – but it should certainly be applauded as a move in the right direction for long-term growth.
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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