News | Question of the Week, WC 13th May
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Q: Brazil's economy faltered in Q1; what is behind the downtrend and is a recession coming?
A: Economic data released in recent weeks underscored that the Brazilian economy struggled at the end of the first quarter, strengthening our case that Q1 GDP fell 0.2% quarter-on-quarter, the first contraction since Q4 2016, and confirming that the economy is now flirting with a renewed recession. The positive effects of low interest rates, low inflation, and a still-competitive BRL have been neutralized by the hit from tighter financial conditions and falling confidence. The effect of temporary shocks in key sectors, such as mining—due to the Brumadinho dam disaster—as well as ongoing structural problems, and the severity of the recession in Argentina, one of Brazil's main trading partners, are partly to blame for the renewed slowdown.
All these temporary factors and structural problems have been exacerbated by deepening political uncertainty. Progress on fiscal pension has been slow, paralyzing the corporate sector, hurting consumers' confidence, and driving a slump in business investment and private consumption. Looking ahead, we expect economic activity to improve over the coming months and the second half of the year, avoiding a renewed economic recession. Low inflation, improving labour and credit markets, and benign conditions for Brazil’s top exports will support the rebound. Our relatively positive scenario, though, assumes the approval of the pension reform in Q3. Uncertainty on this front will continue to constrain the economic upturn and we have to concede that risks are tilted to the downside.
Andres Abadia, Chief Latam Economist
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Posted: 17th May 2019
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