Schroders Quickview: Brazilian GDP facing extreme headwinds

Brazil's latest GDP figure was slightly stronger than expected, but Schroders Emerging Markets Economist Craig Botham sees rising inflation, deteriorating economic conditions and corruption scandals damaging Brazil's prospects for growth into 2016.

27 March 2015

Craig Botham

Craig Botham

Emerging Markets Economist

Brazil has posted a GDP growth reading of -0.2%, year on year, for the final quarter of 2014. This takes growth for the year as a whole to a meagre 0.1%. This was above consensus expectations, but in line with our forecast.

The quarterly reading was stronger than expected, at 0.3% quarter on quarter versus the consensus of -0.1%. Unfortunately, it is all downhill from here.

Economic conditions deteriorating

Data for the first quarter of this year suggests a further slowdown from 2014, which itself was a much worse year for growth than 2013 when GDP posted a 2.4% gain.

Industrial production, unemployment and retail sales have all deteriorated, and the central bank’s own economic activity monitor points to a sharply weaker start to 2015.

2015 is likely to be a lost year for growth in Brazil. 2016 is, already, increasingly looking like a write-off as well.

Meanwhile, inflation continues to climb and will face further pass-through pressure from the weakening currency, forcing tightening from a central bank whose policy rate already stands at 12.75%; one of the world’s highest.

Corruption concern clouding outlook

With the additional headwinds of the 'Lava Jato' corruption scandal, fiscal consolidation and possible electricity rationing, 2015 is likely to be a lost year for growth in Brazil.

There is also now news of a new corruption scandal at the tax appeals board, which will further stifle investment and sentiment.

To make matters worse, President Dilma Rousseff would appear to be rapidly losing the popular mandate to take any action to fix things, with government popularity at its lowest since the last presidential impeachment.

2016 is, already, increasingly looking like a write-off as well.

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