Brazilian economy likely to have contracted in Q1 2016; to remain in recession this year

The Brazilian economic activity indicators on the supply-side imply that the economy’s contraction pace deepened to -6.4% year-on-year in the first quarter of 2016. On a quarter-on-quarter basis, the Brazilian economy is expected to have shrunk 1.3%, said Societe Generale in a research report. Industrial activities in Brazil continue to face cost and domestic demand constrains, while the global economic growth is not expected to rebound in the near term. Hence the Brazilian economy is expected to contract a tad more heavily this year, as compared to 2015. Last year, Brazil’s GDP shrank 3.9%.

On the demand front, investment is likely to steady later in 2016 and expand in 2017 with the help of a rebound in business sentiment following the recent political changes and recovered commodity prices. However, private consumption continues to decline considerably. Consumption is unlikely to bottom out unless the labor market rebounds. Furthermore, there are headwinds to consumption from the likelihood of lowered government spending on social security measures and constant high interest rates and inflation.

The need for the Brazilian government to put the fiscal house in order will adversely impact domestic demand; however, it might help rebound investor sentiment, noted Societe Generale. Net exports are expected to remain the main driver of economic growth, mainly because of subdued imports. The outlook of exports is likely to improve, given that the commodity prices are recovering. But with the subdued global demand growth, export growth is unlikely to stabilise strong enough to set off an investment cycle on its own. Overall, the Brazilian economy is not near to bottoming out and any rebound will be slow in the medium term, according to Societe Generale.