Brazilian economy likely shrank significantly in Q2 on weak trade

Brazil’s data releases on growth indicators imply that the economy is likely to have shrunk at a considerable rate in the second quarter as well. Furthermore, observing closely at the recent retail sales and trade numbers, the Brazilian economy is not expected to return to growth in the next few quarters, notwithstanding industrial production data, noted Societe Generale in a research report.

This is quite challenging when seen in the context of government’s renewed attempts to bring the fiscal house in order.

The trade figures for the month of June showed that merchandise exports declined 14.7 percent year-on-year, the sharpest in five months. This hints at the likelihood that it is too soon to forecast a currency and base effect-led rebound in external demand growth, according to Societe Generale.

The foreign demand situation continues to be weak despite certain rebound in commodity prices. Meanwhile, the growth in imports was the strongest in 15 months in June, in spite of remaining in negative territory at -15.4 percent year-on-year. This implies that demand for investment is possibly close to bottoming out.

The year-on-year change in trade balance became negative for the first time in 14 months due to the sudden change in imports and exports trajectories.

If the developments seen in June continue into the second half of 2016, the trade and current account balances are likely to peak sooner than anticipated, said Societe Generale. Furthermore, this development is negative for the economic growth in the short-run.

Meanwhile, retail sales figures dropped 9 percent year-on-year and 1 percent month-on-month in May, the sharpest in four months. The retails sales print signifies a persistent weakening of consumption demand because of several issues, such as the deteriorating labor market, a likely moderation in government social security spending and higher interest rates, according to Societe Generale.

“The weak consumption demand is the single most important factor behind our projection that the economy will not return to growth next year (on average we expect growth at -0.9 percent in 2017 after -4.1 percent this year)”, added Societe Generale.