2013-01-01 13:22:54 - Brazil Business Forecast Report Q1 2013 - a new country guide report on companiesandmarkets.com
Despite substantial fiscal and monetary stimulus implemented since Q311, we expect a relatively moderate pick-up in economic growth in H212 as reduced consumer purchasing power, due to currency weakness, and high household debt levels weigh on private consumption.
Moreover, we expect a period of household deleveraging to limit private consumption growth in coming years, in line with our forecast for average real GDP growth of 3.6% between 2012 and 2017.
Given our view for economic activity to remain weak in 2012, and below-trend in the next few years, we believe the monetary authorities will prefer to keep the policy rate accommodative, implying that low interest rates are here to stay.
We maintain our view that fiscal consolidation will remain off the cards for
Brazil until after 2014 at the earliest. This is underpinned by substantial spending related to the second phase of the country´s growth acceleration programme, fiscal stimulus aimed at bolstering near-term growth, and rising expenditures in advance of the 2014 general election.
Major Forecast Changes
We have downgraded our 2012 real GDP growth forecast to 1.8%, from 2.4% previously. This comes on the back of weaker than anticipated economic performance in the year-to-date, and our expectation that substantial fiscal and monetary stimulus measures implemented since Q311 are unlikely to bolster growth substantially in 2012.
We revised down our 2012 Selic rate forecast to 7.25% from 7.75% previously to reflect a more aggressive easing cycle and a concerted attempt by the central bank to bring down Brazil´s restrictively high interest rates. Moreover, given our expectation that Brazil´s economic recovery will be relatively moderate over the coming years, leaving limited room for monetary tightening, we have revised down our end-2013 interest rate forecast to 7.75% from 8.50% previously.
Given weakening trade data, we have tempered our current account outlook for Brazil over the coming years. Indeed, we now forecast the current account deficit to come in at 2.0% of GDP in 2012 and 2013, down from 1.7% previously. Although we believe financial account surpluses will comfortably cover the current account shortfalls for the foreseeable future, we expect Brazil´s financial inflows to remain off previous highs due in large part to slowing economic growth in China.
Given weaker-than-anticipated revenue growth in the year-to-date, we now forecast slightly wider nominal fiscal deficits of 2.6% of GDP in 2012 and 2013, from a previous forecast of 2.5%. Moreover, we believe it is increasingly likely that the government will miss its 2012 primary fiscal balance target of 3.1% of GDP.
Key Risks To Outlook
Downside Risks To Growth Forecast: Given average real GDP growth of 0.6% year-on-year (y-o-y) in H112, a weaker-than-expected pickup in domestic economic activity in the coming months could mean that our 2012 real GDP growth forecast of 1.8% is too bullish.
Downside Risks To Interest Rate Forecast: We see no further cuts to the benchmark Selic rate before year-end, implying a hold at the current 7.25% level for the duration of 2012. However, should inflationary concerns pass, and the domestic and external growth outlooks weaken further, the authorities could prolong their aggressive easing cycle, cutting the benchmark rate below our end-2012 forecast. Such a scenario would pose downside risks to our end-2013 interest rate forecast of 7.75% as well.
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