Friday, February 28, 2014

Brazil GDP growth better than expected but challenges remain

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.