Economist Intelligence Unit analisa a economia brasileira

FROM THE ECONOMIST INTELLIGENCE UNIT
The first-quarter GDP figures released on June 1st left observers and the Brazilian government with a sense of foreboding—output grew by only 0.2% quarter on quarter (a mere 0.8%, year on year). The authorities have announced a series of further measures to stimulate private consumption, including an easing of credit conditions, and also are likely to buoy public investment. Even assuming a pick-up in the second half of 2012 in response to stimulus measures (past, present and future), given year-to-date activity in Brazil and a weakening external environment Brazil's GDP is likely to grow closer to last year's tepid outturn (2.7%) than the 3% the Economist Intelligence Unit forecast before the first quarter results were published.
The first-quarter results were lower than the EIU's estimate (0.4%) and the same as the outturn in the fourth quarter of 2011 (see table). There was reason for disappointment practically all round. On the supply side, there was a sharp fall in agricultural production–the steepest since 2005–mainly due to bad weather conditions, affecting one of Brazil's most important export commodities, soybeans. The services sector continued to register relatively weak growth, of some 0.6%.
The major surprise was the rise of 1.7% in the industrial sector (manufacturing, extractive industries, construction and utilities) in the first quarter, incorporating 1.9% growth in the manufacturing segment, which contradicted the grim outlook suggested by the monthly figures published by the national statistics office, the IBGE. Over the last few months, industrial output fell consistently, according to the IBGE's monthly survey. However, the monthly data are based on a smaller sample of sectors than that used to compile the national accounts. The problems facing Brazilian manufacturing were largely reflected in the drop in investment and the significant deceleration in export growth, which stagnated in the first three months of 2012. And in any case, the sequential gain in the first quarter came after a sharp fall in the fourth quarter of 2011 and weakness since the second quarter. In year-on-year terms, industrial output fell 2.6% in the first quarter.

Gross domestic product growth by sector
(% real change, quarter on quarter; seasonally adjusted)
	2010			2011				2012
	2 Qtr	3 Qtr	4 Qtr	1 Qtr	2 Qtr	3 Qtr	4 Qtr	1 Qtr
Agriculture & livestock	2.2	-5.1	0.1	6.8	-1.8	1.2	-0.1	-7.3
Industry	1.3	0.1	1.0	1.4	-0.4	-0.8	-0.5	1.7
of which: Manufacturing	0.8	0.2	0.2	1.3	-0.3	-1.8	-2.2	1.9
Services	1.1	1.4	1.0	0.5	0.8	-0.3	0.4	0.6
GDP at market prices	1.2	0.9	1.0	0.9	0.5	-0.1	0.2	0.2
Source: Instituto Brasileiro de Geografia e Estatística.

On the demand side, continued growth in consumption and government expenditures were not enough to completely compensate for the disappointing performance in investment spending and exports, both hit by the global slowdown in the first quarter. Although there was also a decrease in import growth, the overall contribution of the external sector to GDP continued to be negative.
Looking ahead, investment is unlikely to rebound that strongly, given both the internal domestic problems facing the Brazilian industrial sector–rickety infrastructure and an onerous tax structure–as well as the deteriorating global environment. Recent measures undertaken by the government to boost industrial production and private investment have, to date, had little or no effect, partly due to the high level of external uncertainty. As a result, the authorities have announced a series of further measures to increase consumption and ease credit conditions.

Gross domestic product growth by component
(% change, quarter on quarter; seasonally adjusted)
	2010			2011				2012
	2 Qtr	3 Qtr	4Qtr	1 Qtr	2 Qtr	3 Qtr	4 Qtr	1 Qtr
Household consumption	0.9	2.4	1.9	0.5	0.6	-0.1	1.0	1.0
Government consumption	1.2	0.8	0.2	-0.2	2.1	-0.8	0.5	1.5
Gross fixed investment	3.6	3.2	-0.2	2.1	1.1	-0.6	-0.6	-1.8
Exports of goods & services	-0.3	3.9	2.6	-2.2	2.1	1.8	1.8	0.2
Imports of goods & services	3.9	6.2	1.7	1.1	4.9	-1.8	2.1	1.1
GDP at market prices	1.2	0.9	1.0	0.9	0.5	-0.1	0.2	0.2
Source: Instituto Brasileiro de Geografia e Estatística.

Many observers have been highly critical of these steps given the recent rise in household delinquency rates, particularly in credit for automobile purchases—the sector where the government has chosen to focus the new stimulus package. Measures include the reduction of reserve requirements for the extension of credit for vehicles purchases, as well as aggressive interest-rate decreases in consumer credit lines provided by the two large public commercial banks, Caixa Econômica Federal (CEF) and Banco do Brasil (BB).
Although critics are correct in pointing out the risks of stimulating further indebtedness and consumption in light of the high level of household debt service obligations as a share of disposable income, which currently stands at some 22%, there is a degree of exaggeration in the views expressed by some that the recent measures will be completely ineffective. Although household debt has increased substantially over the last few years, it still accounts for only about 20% of GDP. Furthermore, the deleveraging cycle in Brazil is fairly rapid, given that about 45% of household debt matures in less than 12 months; housing credit (at much longer maturities) accounts for only 5% of GDP. With new measures aimed at facilitating refinancing and the continuation of the monetary easing cycle by the Central Bank—with the Selic likely to be cut by 50 basis points to 8% at the mid-July meeting—it is likely that consumption will pick up in the second half of 2012.
That said, the disappointing result for activity in the first quarter and the small statistical carry over effect (as GDP growth petered out over the course of 2011) imply that even with the introduction of policies to stimulate consumption, GDP growth will almost certainly fall well short of the government's target of between 3.5% and 4%. Therefore, the authorities are already considering a number of additional measures to boost growth. These include further credit extensions to the private sector from the national development bank, BNDES; measures to increase private investment, such as tax breaks for specific sectors; and a possible reduction in the primary fiscal surplus target (either formally, or more likely, by excluding some investment spending from the calculations). Currently, that target is 3.1% of GDP.
However, since gross and net public-sector debt as a share of GDP have been decreasing on a consistent basis, and also as cuts of 400 basis points since August 2011 have reduced debt-interest payments on Selic-linked debt (debt interest payments last year amounted to 5.7% of GDP), the government has some fiscal space to increase expenditures and/or to lower taxes. And given the authorities' concern over the economy's investment rate, which fell to 18.7% of GDP in the first quarter of 2012 from 19.5% a year earlier, it is also highly probable that they will boost public investment. Barring a full-blown euro zone crisis, the government is unlikely to provide a strong fiscal stimulus (of the sort applied in 2009 in the wake of the collapse of the Lehman Brothers investment bank), given that general elections are some way off and the president's personal popularity is high (70%), thanks to still low unemployment levels and her anti-corruption stance.
Although policymakers' ability to lift GDP growth significantly is limited by domestic and external factors, the Economist Intelligence Unit still envisages a tangible rebound in economic activity in the second half of the year, driven by both the stimulus measures already implemented (including an aggressive monetary easing cycle under way since August 2011) and the additional fiscal and credit steps the government is likely to take. That said, given the disappointing first-quarter results, in 2012 Brazil's GDP is likely to grow close to last year's below-potential outturn of 2.7%. But the pick-up in the second half of this year will provide strong carry-over effects into 2013, lifting GDP growth to 4.5%.