By Mary Stokes.
Economic activity stalled in May, darkening Brazil’s already dim growth outlook for 2012. The year began with anaemic quarterly growth of 0.2% in the first quarter. The second quarter looks to be more of the same. The IBC-Br index, a monthly proxy for GDP, indicates virtual stagnation in the first two months of the quarter (Chart 1). Data for June is not yet available.
In a bid to revive growth, the government has announced credit incentives and targeted tax breaks for consumers and struggling industries. It also plans to step up its equipment purchases. The central bank, in turn, has lowered the policy rate – SELIC – a cumulative 450 basis points since August 2011 to an all-time low of 8.0%. However, the measures so far have failed to kick-start growth. As a result, Brazil is unlikely to match last year’s GDP growth of 2.7%. Our previous forecast of 2.0% growth in 2012 now appears overly optimistic and thus, we have revised it downward.
Chart 1: Economic activity is sluggish so far in 2012
We are anticipating a growth revival later this year as stimulus measures begin to have an effect. However, even if growth speeds up in the third and fourth quarters as we expect, to a seasonally adjusted quarterly growth rate of 1.4% (which is above the average trend growth rate of 1.0% since 2006), Brazil’s economy is set to grow by only 1.7% in 2012 (Chart 2). This figure assumes a quarterly growth rate of 0.4% in the second quarter. If our GDP forecast for this year of 1.7% proves correct, this will mark the lowest annual growth rate since the height of the global financial crisis in 2009.
Chart 2: Growth is expected to pick up in second half of 2012
Other analysts have parsed the latest data and reached the same conclusion. According to the latest central bank survey of market watchers, the consensus forecast for GDP growth this year has fallen to 1.9%, significantly lower than the 3.1% expected just two months ago. In contrast, the central bank and IMF are forecasting GDP growth of 2.5%.
Notably, we see major downside risks to our forecast. Growth may not gather pace in the second half of the year as we (and many other analysts) expect. As mentioned above, we have pencilled in an average quarterly growth rate of 1.4% for the third and fourth quarters, but this is above trend growth and may not materialize.
We are assuming that the stimulus measures announced so far, in the form of tax breaks and interest rate cuts, will begin to invigorate economic activity. However, high frequency data is not encouraging. In July, business confidence fell to its lowest level since 2009, according to the monthly survey by the National Confederation of Industry (CNI). Meanwhile, consumer confidence remains upbeat, though it has slipped over the past two months.
The global backdrop is unlikely to provide much relief. The eurozone debt crisis remains unresolved and the threat of a breakup continues to loom. Meanwhile, growth in China – Brazil’s largest export market and a major buyer of its commodities – slowed to 7.6% annually in the second quarter, its slowest pace of growth since the beginning of 2009. While the worst is likely behind us, expectations of a speedy growth pick-up in the second half of the year could prove overly optimistic.