Fine-Tuning Economic Policy

The long-awaited rebound in growth finally occurred in Q2 2013 thanks to an upturn in investment. Yet signs of a slowdown have already appeared in Q3 2013. Deteriorating public accounts have limited the government’s room of manoeuvre despite needs for infrastructures investment. To reduce the downward pressure on the real and reassure investors by easing inflation, the central bank not only relaxed its currency controls but also proposed a programme to cover foreign exchange risk through the end of the year. The amount of monetary tightening that is still needed risks squeezing growth even further, which is likely to be mild in 2013.

A short-lived rebound
Brazilian growth was stronger than expected in Q2 2013 with a rise of 1.5% on a quarterly basis and 3.3% year-on-year. Yet given the uncertainty about world economic trends, there are still major downside risks.

The rebound in growth is mainly due to robust investment (+3.6% for the quarter and +8.6% y/y). Over the year, the investment rate increased by one GDP point, up to 20.8% of GDP. Yet the two main growth engines, public consumption and household spending (up 0.9% and 2% y/y, respectively, in Q2 2013), have gradually slowed since the beginning of the year. Foreign trade net contribution to growth became positive again (+0.7 percentage points): exports picked up strongly (+6.9% for the quarter and +6.6% y/y) thanks to an historical bumper soybean harvest in March (+25% y/y), while imports slowed (+0.6% for the quarter, +7.5% y/y).

The industrial sector clearly recovered (+2.8% y/y vs. -1.4% in Q1 2013), buoyed by a more favourable exchange rate. For the second consecutive quarter, the primary sector continued to make a very positive contribution (+13% y/y) thanks to the soybean harvest. The services sector also continued to grow, albeit at a more moderate pace (+2.3% y/y).

Even so, signs of a slowdown have already appeared during summer. The central bank’s economic activity index (IBC-BR), a monthly proxy for GDP, declined 0.33% in July and rose only 2.6% y/y vs. an average of 3.5% in Q2 2013.

Consumers’ confidence indicators have declined since April, and even contracted sharply in July following monetary tightening and growing social unrest.

Additionally, retail sales growth stagnated after gradually deteriorating since the beginning of the year. The industrial output index was already at 3.2% in July (higher than the Q1 average), with a slowdown in August.

Given the slowdown in economic activity between July and September, we expect Brazilian growth to remain mild in 2013 at an estimated 2.7%.

BY Sara CONFALONIERI

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