Brazil's economy: not much to cheer about
As the football World Cup kicks off in Brazil, the Brazilian economy continues to struggle on the back of weaker demand from China, heightened political uncertainty and continued large structural problems.
The softening of Chinese growth over the past couple of years has put pressure on both Brazilian growth and the Brazilian markets. Despite weak Brazilian growth, inflation has remained elevated and the Brazilian central bank has reacted to this by tightening monetary policy considerably over the past year - further putting downward pressure on Brazilian growth.
Weak growth and fiscal easing ahead of the presidential elections in October have caused a further worsening of public finances. This has led to an unfortunate policy mix - tight monetary policy and too easy fiscal policy. We expect Brazilian growth to remain lacklustre over the coming year, with GDP growth of 1.5% this year and 1.8% and 2.4% in 2015 and 2016 respectively.
Brazil likely to win the World Cup - Spain set to disappoint
While there is not much to cheer about regarding the Brazilian economy, we believe the Brazilian population will at least be able to cheer about its national teams result at the upcoming football World Cup.
In this document, we present our forecasts not only for the Brazilian economy but also for the outcome of the World Cup. We have estimated an econometric model for the World Cup result based on data from the five previous World Cup tournaments and used the model parameters to simulate the upcoming World Cup and the results are clear to us.
In our view, home advantage, a large population and a strong football tradition will ensure that Brazil wins the World Cup. We believe Argentina will be in the running but will lose to Brazil in the final. Germany will take third place.
However, chance is a major factor in football, so nothing is given - not even for Brazil. To describe these factors we have used so-called Monte Carlo simulations to estimate the probability of different teams winning the World Cup. Brazil is strong favourite, with our simulation indicating a 45% chance that Brazil will win the tournament. We calculate the runners up are much less likely to win, with Argentina having an 8.1% chance, Germany 7.6% and France 6.7%.
We believe Spain will be the big disappointment of the tournament and believe it is likely to exit the tournament after losing to Italy at the quarter final stage. We see only a 4% likelihood of Spain winning the 2014 World Cup.
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