Schroders Quickview: Brazilian recovery will take time and luck

Craig Botham

Craig Botham

Senior Emerging Markets Economist

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Brazil's first quarter GDP growth of -5.4% year-on-year sounds devastatingly bad, but such is the state of the Latin American economy that it is actually an improvement.

The figures were better compared both to expectations and to last quarter’s performance. Still, -5.4% is hardly cause for celebration, and 2016 will not be a banner year for the economy.

A breakdown of the data reveals that the improvement was driven by stronger government spending, net exports, and investment. Government spending is unlikely to be much of a driver going forward given planned austerity, and this increase at least partially reflects the attempts by the outgoing president, Dilma Rousseff, to shore up support with largesse for her base.

The contribution of net exports, boosted almost entirely by better export performance, can be attributed to the weaker currency and lower unit labour costs. This should persist for most of the third quarter, after which the currency impact will begin to fade.

Perhaps most interesting though is the performance of investment. Although still contracting, it was much less of a drag than in the fourth quarter.

When we also consider a rebound in business confidence witnessed in survey data, we could conclude that the formation of a new government has returned investment confidence to the economy.

If this narrative is correct, the revival is somewhat hostage to further political developments. Unfortunately, President Temer’s government has hit a few stumbling blocks already, raising the risk of a reversal in this tentative recovery.

For now, we think there is sufficient political incentive for the passage of limited reforms, and consequently this recovery should extend, but plateau at a low level next year. However, if the Temer government’s struggles become more serious, we will have to reassess our view.