Emerging Markets Economist
2015 was a disastrous year for the Brazilian economy, and there is more pain to come. At some stage this year though, the worst may be over.
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Real GDP contracted 5.9% year-on-year in Brazil in the final quarter of 2015, sealing Brazil’s worst recession in thirty years.
Nor is the pain likely to be over yet; most metrics continue to deteriorate, and 2016 will likely also see a painfully deep recession.
A breakdown of the data shows the biggest individual fall came in investment, which contracted almost 19% on the year.
In the light of the Lava Jato scandal, which has reached construction companies and financial institutions as well as Petrobras, this is unsurprising.
But with the investigation likely to continue for the rest of this year, the outlook for investment is still bleak.
We believe the political and business uncertainty associated with the scandal will see investment decisions deferred where possible.
Consumption also contracted sharply, almost 7% year-on-year, and with unemployment still rising, it may take until 2017 to see the beginnings of a recovery here.
The one positive for growth was on the trade side. Exports grew 12.6% year-on-year, despite commodity price weakness, while imports contracted 20%.
Net exports should continue to benefit from the weaker currency and falling unit labour costs, both of which boost competitiveness. This might also prove to support investment later this year.
It is easy to be bearish on Brazil. Can we find reasons to be positive? Perhaps; labour costs are being pushed down, the currency remains weak, and the current account balance is very slowly moving out of deficit.
It is too soon to call a turning point, but we do think that at some stage this year the worst may be over for Brazil's economy.
However, to really turn Brazil around, we need to see serious macro and microeconomic reforms, to tackle supply side bottlenecks, fiscal laxity and gaping infrastructure needs.
We do not believe Dilma Rousseff is the president to deliver this. The best case scenario for Brazil remains one of impeachment, annulment, and new presidential elections.
The odds of this seem to be growing, but we still have some way to go.