Brazilian economy likely to contract by 2.5% in 2015

Economic data for the second quarter confirmed Brazilian economy is now in technical recession. Q2 GDP came in at -1.9% Q/Q and Q1 GDP was revised down to -0.7%. The data was worse than expected. The country expected to post a negative growth of 2.5% y/y for full year in 2015, estimates Nordea Bank.

GDP contracted by -1.9% Q/Q in Q2, which was worse than expected. Low confidence, tighter monetary policy and worsened terms of trades are pulling the break on activity and investments. Both investments and imports contracted at their fastest pace since the financial crisis, with investments down by 8.1% Q/Q and imports down by 8.8% Q/Q, notes Nordea Bank.

At the same time it confirmed the government's challenges in reaching fiscal consolidation this year, as government consumption increased by 0.7% over the quarter. This is mainly due to a lack of political consensus on whether to cut mandatory government spending, which has continued to increase, says Nordea Bank. At the same time the contracting economy makes it hard to improve government revenues. Moody's earlier this summer downgraded Brazil by one notch and based that on, among other things, the failure of the government in improving the fiscal balances and reversing the rising debt trend. The negative print did not have any big impact on the BRL, as the economic downturn already seems very much priced in by markets.