By Mary Stokes.
Brazil’s economic growth prospects for 2012 look increasingly bleak. The government has cut its GDP growth target twice in recent months, but it is regularly behind the curve. The Ministry of Finance projected GDP growth of 4.5% in 2012, according to a presentation published in April. Then, in late May, the finance minister, Guido Mantega, lowered the projection to 4% at a hearing of the Senate’s economic affairs committee. A few days later, after the release of disappointing Q1 GDP figures on 1 June, even the finance minister was forced to admit that the new 4% target looked unattainable. This continues the government’s pattern of over-promising and under-delivering on GDP growth.
The chart below demonstrates why 4% growth in 2012 is highly unlikely. To meet the target, the economy would need to grow by at least 2.3% on a quarterly seasonally adjusted (sa) basis over the remainder of 2012, assuming a constant rate of growth. The only time Brazil has come close to achieving such a feat in the past decade was in 2009-10 when the economy achieved three consecutive quarters of growth above 2% following a sharp contraction at the height of the global financial crisis.
The danger is that the economy may not even eke out the 2.7% annual growth that it managed in 2011. High frequency data – industrial production, auto sales – suggest Q2 is shaping up to be another disappointing quarter. The government has admitted as much, with the finance minister saying in early June, “I think we will be happy to beat last year’s GDP.” Notably, however, it still has not revised its 4% growth target downward.
Given the facts on the ground, we are expecting only a modest uptick in quarterly GDP growth in Q2 2012. If GDP rises by 0.6% on a quarterly sa basis, following a 0.2% rise last quarter, then the economy still would need to grow by 2.4% in the remaining two quarters (well above the average 0.9% quarterly growth rate seen in the chart above) to match the 2.7% annual growth registered in 2011. Despite interest rate cuts and government stimulus measures, such high quarterly growth rates look out-of-reach. Notably, Brazil’s quarterly growth rate has not exceeded 1% since Q2 2010 (see chart above).
We are currently forecasting annual GDP growth of 2.8% for 2012. Given the weak Q1 GDP outturn, this will be revised downward in our next Monthly Forecast unless we see a significant turnaround in the forthcoming monthly data. According to the latest central bank survey, the market consensus is forecasting GDP growth of 2.5% for 2012, down from its 3.2% growth forecast one month ago. It appears time for the government to move the goal-post once more and lower its growth target. This time, let’s hope it’s more realistic.
Source: Timetric (Mary Stokes)