Brazil's economic stability likely to continue in coming quarters

The Brazilian economic growth shrank below expectations on a sequential basis in Q1 2016. Brazil’s GDP has been declining for five straight quarters; however, the pace of contraction has begun to stabilize. The stability seen in economic activity is likely to continue in the quarters to come. This is expected to be aided by a recovery in sentiments due to positivity in the new government’s business friendly approach, commodity prices stabilization and the likelihood of monetary policy easing towards next year, said Nordea Bank in a research report.

“We forecast negative growth around 3.5% this year and a slight improvement to 0.4% in 2017”, added Nordea Bank.

Brazil’s GDP growth in the first quarter contracted 0.3% q/q, as compared with consensus projections of a contraction of 0.8% q/q. Exports and government expenditure positively contributed to the economic growth. Meanwhile, imports and private consumption deteriorated and fell into negative due to subdued consumer sentiment.

Also, labor market is deteriorating with the jobless rate reaching 11.2% in April. Interest rates and inflation rates continue to remain at higher levels. Moreover, investments continue to be a drag on the economic growth; however, stability was witnessed in the first quarter, as compared with the previous quarter.

Meanwhile, Brazil’s interim President Temer’s initial weeks in the office have been difficult. However, markets have been upbeat about the new government and have been positive about the possibility of additional business-friendly reforms. In May, both the business and consumer confidence indicators rose. The new cabinet announced for Temer’s government was also received positively.

“We continue to see risks of a sharp move higher in the USD/BRL in the near term, as political uncertainties relating to the Temer government’s ability to gain political support and the ongoing Petrobras investigations add to upside risks”, added Nordea Bank.