Sentiment in emerging markets was given another assist today with better-than-expected fourth quarter of 2013 GDP data out of Brazil. GDP growth came in at +0.7 for the quarter for annual average growth of 2.3% for 2013 as a whole. The consensus market expectation was for a number around +0.3%.
Had the number met market expectations
(which was below our forecast of +0.5%) I was about to lower my forecasts for
2014. As it stands I will wait for more
partial activity data from early 2014 before making a call. I am therefore sticking to my expectation of
annual average growth of 2.0% for 2014, although acknowledge the risks are
biased to the downside.
Today’s GDP result tells us that domestic
demand, particularly business investment, is holding up better than
expected. Indeed business investment
posted a 0.3% q/q gain in the quarter when the partial data had suggested a
further contraction following the -2.0% decline recorded in Q3 was likely.
Also, near full employment is helping
support consumption activity in the face of higher interest rates. But therein lies part of the structural
challenge for Brazil. The labour market
remains strong with seasonally adjusted unemployment falling from 5.2% in
December to 5.0% in January. The strong
labour market has seen wage growth accelerate with average real wage growth up
from 3.2% yoy in December to 3.6% in January.
At the same time, investment as a share of GDP remain at a relatively
low 18.4% of GDP which is why we worry about Brazil’s potential rate of GDP
growth and inflation.
Annual inflation reached 5.65% in February,
up from 5.59% in January. The increase
was in large part due to seasonal factors so the central bank was unlikely to
view this negatively. Indeed while the
monetary policy committee of the central bank (COPOM) raised the Selic rate by
25bps earlier this week that was a reduction in the pace of tightening as this
hike followed 6 successive increases of 50bps.
It therefore appears COPOM is close to the
end of the tightening cycle. But while
the impact of higher interest rates on domestic demand is still yet to fully
play out, the risks to growth remain based to the downside.