Brazilian economy unlikely to expand in near term; to remain in recession throughout 2016

The Brazilian economy is not expected to expand in the near term and is likely to keep shrinking throughout 2016, noted Societe Generale in a research report. In the first quarter of 2016, the Brazilian economic activity had contracted 6.3 percent year-on-year and 5.4 percent on sequential basis after shrinking 6.3 percent year-on-year in the fourth quarter of 2015.

In May, the Brazilian economic activity is likely to contract 5.2 percent year-on-year, added Societe Generale. Given the April release and May’s forecast, the second quarter growth is seen improving at marginally over -5 percent year-on-year.

The rate of contraction of industrial output has decelerated in the past few months and if the seasonally adjusted monthly growth continues to be flat in June, industrial production would be seen growing on quarterly basis for the first time since the second quarter of 2013.

Given the exception of a solid contribution from net exports due to sharply declining imports, aggregate demand continues to face sharp headwinds, and therefore the Brazilian economy is not expected to expand in the near term, according to Societe Generale.

On the demand side, the first quarter GDP release of Brazil had surprised on the upside due to the rise in government spending and a sharp contraction in imports that led to net exports contributing positively to growth. But the persistent fall in imports continue to indicate subdued domestic economy, while the government continues to be under a heavy obligation to lower spending.

Since the rate of slowdown of consumption growth continues to be significant, it bolsters the argument for the economy to continue to remain in recession throughout this year.

“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.