Wednesday, December 4, 2013

GDP Growth in Brazil and India

Two important emerging market GDP results were released this week.  In India September quarter GDP growth came in slightly stronger than expected, while growth for the same period in Brazil was disappointingly soft.

In India GDP expanded 4.8% yoy in September, up from 4.4% in the year to June.  This was higher than market expectations of 4.6%.

On a sectoral basis the upside surprise was agriculture with industrial growth also bouncing back after a weak June quarter.  Growth in the services sector continued its decline.   On an expenditure basis growth was driven by the two factors we expect to continue to drive a pickup in growth in the period ahead; exports and investment.  Higher exports had been showing though in the monthly trade data which largely reflects the recent weakening in the exchange rate.  Investment rose 2.6% yoy in September, up from -1.2% last quarter.  Consumption was soft reflecting weaker government spending as fiscal policy tightens.

Looking ahead I’m comfortable with my annual average forecast of 4.7% growth for the current calendar year, rising to 5.5% in 2014.  The positive impetus into next year comes primarily from efforts to unlock the pipeline of investment projects.  Exports will continue to benefit from the weaker exchange rate and a pick-up in global growth next year.  Offsetting those positives we expect fiscal policy to remain contractionary which will keep consumption contained.

The news out of Brazil wasn’t so good.  GDP growth in the September quarter posted its first quarterly contraction since the March quarter of 2009.  GDP contracted -0.5% qoq to be up 2.2% in the year to September.  That compared with 3.3% for the year to June.  We warned at the time it was released that strong June quarter growth (which was revised up from 1.5% qoq to 1.8%) would not be sustained and there would be payback in the third quarter, but the result was lower than expected.

The weakness was across all sectors of the economy.  Agriculture gave back most of the gains of last quarter while the industry and service sectors slowed to a virtual standstill.  Most disappointing however was the decline in exports, especially given the recent depreciation in the exchange rate.

As we’ve discussed before, the Brazil economic story is largely one of structural roadblocks.  It seems counter-intuitive that as growth slows, the Brazil central bank is hiking the Selic rate to contain strong inflation pressures.  Easier monetary policy is not the answer in Brazil.  Indeed we argued as monetary policy was easing aggressively over 2011/12 that it would be quickly followed by an aggressive tightening cycle.

Looking ahead this result knocks my calendar 2013 GDP forecast back to 2.3% (annual average).  Into next year we believe the impact of higher interest rates will more than offset the competitiveness gains from the weaker exchange rate, especially given the structural impediments to growth.   We continue to expect 2.0% growth next year.