Research and analysis

Brazil: Economic update - September 2014

Published 3 September 2014

0.1 Detail

Latest economic data indicates Brazil is in a technical recession after two consecutive declines in quarterly GDP. In Q2, GDP contracted by -0.6% and the change in GDP in Q1 was revised down from +0.2% to -0.2%. 2014 growth below 0.5% in 2014 now looks probable.

Main drags on Q2 GDP were a fall in industrial output (-1.5%) and in the services sector (-0.5%). Both were hit by slower consumer demand growth, just 0.3% in Q2, and by fewer working days due to the World Cup. Industry is also suffering from the rising cost of borrowing, and the Central Bank’s support for the Real which hurts export competitiveness. Private investment fell sharply (-5.3%). Only agriculture grew (0.2%).

In July and August some relief came for household budgets with very low increases in prices. However, budgets are still being squeezed by increases in the interest rates households pay on their loans.

Rising unemployment over the coming months would make technical recession felt. The chances of this happening are rising. Industrial employment fell by 2.3% in the first semester but the services sector absorbed the slack. In July however, formal job creation slowed to under 12,000, its lowest level in 15 years. More comprehensive data on unemployment has been delayed by a strike in the statistical authority which is now over.

Slow growth is sometimes blamed on the impact of the global financial crisis. But it was Brazil’s strict and solid financial architecture, strengthened in the 1990s, that shielded it from the brunt of the crisis. Brazil was also less buffeted by the crisis by its relatively low openness, with a ratio of goods trade to GDP of just 20%.

Just-released fiscal numbers show the primary fiscal surplus is shrinking fast. The government was aiming to save £21.5bn in 2014 but with 7 months gone had only saved £6.6bn. This means less cash available, and more borrowing needed, to service Government debt interest payments, which, at over 5% of GDP, are proportionally highest in the G20.

Any new Government will need to make some fiscal adjustment. Possible loss of investment grade by one or more of the rating agencies still looms large. The current government is making cutbacks where it can, as a 0.7% fall in Q2 government spending on goods and services shows.

0.2 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.