Brazilian GDP growth accelerates ahead of expectations

Brazilian economic activity accelerated in the third quarter, with yearly growth stronger than expected at 1.4%, from 0.4% previously.

Upward revisions to the second quarter data mean Brazil is on track to beat consensus expectations for 2017 as a whole, and we are encouraged to see a strong pick-up in investment.

Acceleration in growth led by investment

A breakdown of the data on an expenditure basis shows that the acceleration was led by a recovery in investment. On the quarter investment expanded 1.6%, such that the yearly growth rate is now only just negative, at -0.5%. Given a 6.7% annual contraction in the second quarter, this is a huge improvement.

Consumption was also strong, growing 2.2% year-on-year, up from 0.6% previously. One slight downside to this pick-up in consumption is the increase in imports. This is likely to weigh on the current account balance and, over time, could threaten the currency.

A sector breakdown shows a fairly broad-based recovery. Activity did slow in agriculture and mining, but picked up in most other sectors. Manufacturing, construction, retail, and real estate put in strong performances compared to the previous quarter.

Political uncertainty to increase ahead of elections

Overall this is an encouraging set of data, particularly the recovery in investment.

If we have any concerns, they would be that the reliance on consumption for growth is not desirable given the Brazilian consumer’s indebtedness, and the likely impact on the current account. Brazil needs to avoid any fresh build-up of external vulnerabilities.

We also see a risk to investment growth as political uncertainty builds ahead of next year’s elections. The prospect of economic nationalism, or populism, could weigh on the nascent recovery in investment.