2013-02-21 09:09:14 - New Country Reports research report from Business Monitor International is now available from Fast Market Research

Core Views

Following a massive slowdown in 2012, we expect the Brazilian economy to rebound in 2013. This view is underpinned by our projection that fixed investment will pick up over the coming quarters as the government pushes through projects in advance of the expiration of the PAC II growth acceleration programme and FIFA World Cup in 2014. That said, we continue to expect that a period of household deleveraging will constrain private consumption growth in coming years, in line with our forecast for average real GDP growth of 3.5% between 2012 and 2017.

Given our view for economic activity to remain 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. However, with inflation expectations having increased in recent months and supply-side pressures likely to remain elevated over the coming months, we forecast 25 basis points of hikes by end-2013, bringing the Selic target rate to 7.50%.


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We maintain our view that fiscal consolidation will remain off the cards for Brazil until after 2014 at the earliest. This is underpinned by our expectation of substantial spending related to the second phase of the country's growth acceleration programme and the 2014 general election, fiscal stimulus aimed at bolstering near-term growth, and indications the President Dilma Rousseff's government is looking to relax Brazil's fiscal regulations.

Major Forecast Changes

We have downgraded our 2012 real GDP growth estimate to 1.0% and our 2013 forecast to 3.5% as we believe Brazil's economic recovery is progressing more slowing than we initially anticipated. That said, we continue to anticipate a substantial uptick in economic activity this year, as a rebound in fixed investment boosts growth.

We anticipate that a modest recovery in exports on the back of the current cyclical upswing in Chinese growth, favourable base effects and strong agricultural harvests will bolster Brazil's external accounts this year. As such, we forecast the current account deficit will come in at 2.2% of GDP in 2013, a modest improvement from an estimated 2.3% of GDP deficit in 2012. In addition, while we continue to believe financial inflows will remain off their previous highs, we expect the financial account surpluses will still comfortably cover the current account shortfalls for the foreseeable future.

We believe an uptick in expenditures will offset a modest increase in revenues in 2013, meaning that the nominal fiscal deficit will remain substantial at 2.6% of GDP this year. Moreover, in line with recent statements by members of President Dilma Rousseff's administration, we now believe the government will miss its 2013 primary fiscal balance target of 3.1% of GDP, as it looks to have done in 2012.

Key Risks To Outlook

Downside Risks To Growth Forecast: Should fixed investment disappoint in 2013 on the back of project delays, as it did in 2012, economic activity could remain weaker than we currently expect in the coming quarters. Such a scenario would pose major downside risks to our 2013 real GDP growth forecast of 3.5%.

Downside Risks To Interest Rate Forecast: Given our expectation for economic activity to pick up over the coming quarters, while supplyside price pressures remain elevated, we forecast 25 basis points of hikes by end-2013, bringing the Selic rate to 7.50%. However, the central bank's rhetoric continues to indicate that rates will remain on hold at the current 7.25% level. Should growth pick up more modestly than we currently anticipate over the coming months, we could see the monetary authorities hold the policy rate at 7.25% or even cut this year.

About Business Monitor International

Business Monitor International (BMI) offers a comprehensive range of products and services designed to help senior executives, analysts and researchers assess and better manage operating risks, and exploit business opportunities, across 175 markets. BMI offers three main areas of expertise: Country Risk BMI's country risk and macroeconomic forecast portfolio includes weekly financial market reports, monthly regional Monitors, and in-depth quarterly Business Forecast Reports. Industry Analysis BMI covers a total of 17 industry verticals through a portfolio of services, including in-depth quarterly Country Forecast Reports. View more research from Business Monitor International at www.fastmr.com/catalog/publishers.aspx?pubid=1010

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