Brazilian economy contracts more than expected in Q2, likely to shrink over 3 pct this year

The Brazilian economy continued to shrink in the second quarter of 2016. It came in a bit worse than market projections. The GDP contracted 2.3 percent quarter-on-quarter in the quarter, as compared with market forecasts of a contraction of 2 percent. This is the sixth straight quarterly contraction.

The domestic economy of Brazil continues to be very subdued. Government spending and personal consumption declined 2.2 percent and 2.7 percent respectively. However, investment countered some of the decline by growing 1.7 percent, breaking a 10-quarter streak of declines, said TD Economics in a research note. Final domestic demand of the country continues to be over 10 percent below its peak in the first quarter of 2014.

Meanwhile, exports rose modestly by 1.7 percent after growing sharply by 18 percent in the previous quarter. Meanwhile, imports rebounded surging by 19 percent in the second quarter, after contracting for four straight quarters. However, net exports weighed on the Brazilian economic growth in the quarter.

The sharp rise in imports might be Olympics related and there might reverse in the third quarter. Admittedly, the external sector is likely to be supportive of growth in the future, with exports of goods and services underpinned by a weak, though, rising real and stronger demand from developed economies.

Even if sentiment in the economy appears to be rebounding, economic conditions continue to be quite challenging as it is faced with high inflation, high unemployment and high interest rates. The Olympic Games might give some support in the third quarter; however, the effect would likely be temporary. Overall, the Brazilian economy is expected to shrink over 3 percent this year, a tad better than the 3.8 percent contraction seen in 2015, according to TD Economics.