Research Dept. News
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Monthly Report, num 331 - January 2010
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International review - Brazil
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Brazil: rising GDP, falling euphoria
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Although less than expected, Brazilian GDP continues to improve and is on the road to recovery.
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«Slow and steady wins the race». A great piece of advice that encourages prudence, highly opportune given the recent disappointment of those who, erring on the side of euphoria, expected a much livelier recovery for the Brazilian economy. However, although recovery may not be so lively, that doesn't mean it's not true: in the third quarter of the year, Brazilian GDP grew 1.3% compared with the previous quarter, its second rise after the crisis. A recovery that is gaining in pace as it advances and whose driving forces bear out its local nature.
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In fact, domestic expenditure has once again confirmed its position as the mainstay of Brazil's recent growth, although it has changed its leader: in the third quarter it was investment that, rising 6.5% between June and September, took over the baton from consumption and stepped in as the driving force. Consumption was up 2% compared with the previous quarter but slightly moderated its upswing, insofar as state expenditure rose 0.5% compared with June. The greatest disappointment came from the external flank, the main victim of the strong real, with a trade balance suffering from the bitter taste of a lethal concoction: the fall in exports (8%) and rise in imports (7%).
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In year-on-year terms, growth has once again slowed up its decline but has not yet managed to turn it round, falling 1.5% compared with the third quarter of 2008. Once again, the blame lies with the foreign sector, with exports down 32% compared with the same period in 2008, followed by investment, down 7.4%. For its part, consumption rose again, up 0.8% and being supported by the push from credit and fiscal stimuli. Stimuli that explain, in turn, a large part of the growth in public expenditure, 1.5% year-on-year.
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Investment is acting as a driving force with external demand suffering from the strength of the real.
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In any case, although third quarter growth did not meet the expectations of the consensus, there's no cause for alarm as the most recent figures from leading indicators continue to anticipate steady improvement in Brazil's economy. To start with, consumer confidence, although easing slightly in November, remains at historically high levels. Similarly, retail sales grew by 7.3% year-on-year in October, boosted by the continued progress in both the credit and labour markets, with unemployment falling to 12%.
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On the supply side, industrial production in October increased 2.2% compared with September and notably reduced its year-on-year drop, going from a fall of 7.7% in September to just 3% the following month. This was partly helped by an automobile industry whose production was up 15.7% compared with September (6.3% year-on-year). For its part, the purchasing managers' index (PMI) reached its highest level in the last two years, namely 55.5 points, clearly above the threshold of 50 that indicates expansion.
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Leading indicators anticipate steady improvement.
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In short, the recipe chosen by Lula's government, namely more credit and fewer taxes, has had the desired effect. Brazil is taking on the New Year with solid domestic demand, record high confidence levels, expanding industry and safe from inflationary pressure. Now all that's left is for foreign demand to pick up and, in this respect, more contained euphoria and less pressure on the real is good news.
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