Brazilian economy continues to contract heavily; unlikely to recover in near-term

The Brazilian economy is likely to have continued shrinking heavily. In the first quarter of this year, economic activity shrank 6.3 percent on annual basis and 5.4 percent on quarter-on-quarter basis after a 6.3 percent contraction recorded in the fourth quarter of 2015.

Brazil’s supply-side economy is likely to have shrunk 5.1 percent year-on-year or 3.5 percent quarter-on-quarter in the second quarter, based on the April-May releases and June’s estimate of a contraction of 5.4 percent year-on-year and 0.7 percent month-on-month, said Societe Generale in a research note.

Therefore, the economic activity releases are consistent with the projection of an economic contraction of 3.4 percent quarter-on-quarter in the second quarter and 4.1 percent contraction for the whole of 2016.

Meanwhile, on the demand side, the Brazilian economy continues to face serious challenges on the external as well as on the domestic front. On the domestic front, government spending and private consumption are likely to shrink more. However, sharply subdued export figures in June show limitations of a trade-led recovery.

Under this scenario, a solid investment rebound might not be easy to come by and the economy appears to shrink further.

“We currently forecast the economy to contract by 4.1 percent this year followed by a further 0.9 percent in 2017,” added Societe Generale.