By Itau BBA.

GDP growth came in slightly below expectations in 2Q12. Notwithstanding the pickup in relation to previous quarters, the pace was quite gradual, and very reliant on tax incentives to consumer spending. Demand growth slowed down, largely due to the fourth straight contraction in investments and the significant drop in exports. On the supply side, agricultural and livestock GDP largely compensated the decline of the previous quarter, while the expected retreat in the industrial sector was confirmed. The service sector accelerated, but at a somewhat-slower speed than we estimated. We expect a pickup in economic activity in the second half of the year. However, even with this expectation, the lower-than-expected reading for Q2 will probably prompt a small downward adjustment in our 2012 GDP growth forecast, currently at 1.9%.

GDP expanded by 0.4% qoq/sa and 0.5% yoy, slightly below our call (0.5% and 0.6%, respectively) and market consensus (0.5% and 0.7%). Growth in the two previous quarters was revised down to 0.1% from 0.2%, due to changes in seasonal factors.

The performance of demand excluding changes in inventories was weaker than our forecast. Consumer spending increased by 0.6% qoq/sa (our estimate: +1.0%), while government spending went up by 1.1% (our estimate: +0.4%). Gross fixed capital formation (GFCF) was a negative surprise. Notwithstanding increases in output and imports of capital goods, fixed investment in Q2 retreated by 0.7% (our estimate: +0.9%). Construction probably weighed negatively on the result, as indicated by data on construction material, which fell in Q2.

External demand weakened from April through June, with a sharp decline in exports (3.9% vs. our estimate of -2.7%). Slow growth in the global economy contributed to cool down sales to the external sector, but temporary factors also played a role, including labor strikes which affected shipments, particularly in June. Imports rose by 1.9% (our estimate: +2.7%).

In aggregate terms, domestic demand advanced by 0.5% (from 0.7% in Q1), while total absorption was stable. These figures indicate that the change in inventories gave a positive contribution to Q2 GDP. In the industrial sector, for instance, the inventory adjustment process was still on course during Q2, but less intensely than in the previous quarter, which may have contributed positively to GDP growth.

The investment rate (GFCF/GDP) stood at 17.9% last quarter (from 18.7% in Q1). The investment rate accumulated over four quarters was 18.8% in Q2.

From the supply standpoint, the highlight was the 4.9% lift in agricultural and livestock, which topped our call (+0.8%) and largely reversed the 5.9% drop in Q1. Industry retreated by 2.5% (our estimate: -2.3%) and services increased by 0.7%, accelerating less than we expected (our estimate: 0.9%).

The pickup in activity in Q2 was quite gradual, and largely explained by the IPI tax cut on vehicle production (we estimate that the IPI tax cut contributed about 0.3 percentage point to Q2 growth). We expect a pickup in economic activity in Q3 and Q4. There are plenty of stimuli in the economy. In addition to lower interest rates, some tax incentives will still impact purchases of durable goods in Q3, and in a relevant way. Despite this expectation, we will likely prompt a small downward adjustment in our 2012 GDP growth forecast (currently stands at 1.9%) due to a slightly weak Q2 reading. For 2013, we estimate GDP will expand by 4.5%.

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