Brazil Weaker Than Expected

May 30 2014, 2:47pm CDT | by

Brazil’s first quarter GDP was in line with consensus forecasts, but revisions to the fourth quarter have led investors to revise their full-on 2014 outlook.

The iShares MSCI Brazil (EWZ) responded in kind, falling 2.2% while the benchmark MSCI Emerging Markets Index fell 1.5%.

First quarter GDP expanded by 0.2% on a quarterly basis, an inch below Barclays’ 0.3% forecast but still in line with consensus. As expected, today’s release brought revisions to the historical series driven largely by the methodological change in industrial production announced earlier this month. Despite the downward revision of the fourth quarter growth rate to 0.4% from 0.7% previously, 2013 real GDP growth was revised up to 2.5%. However, the weaker 2013 year-end also lowers the statistical carry-over expected for 2014 and adds some downward risk to Barclays’ 1.9% 2014 full-year forecast. On a yearly basis, Brazil’s GDP expanded by 1.9%.

Nomura Securities analyst Tony Volpon said Brazil’s 2014 GDP could easily come in below 1%.

“The most alarming sign is the simultaneous contraction of consumption and investments, a situation which last occurred in 2011 and preceded a period of fairly slow growth,” said Volpon.

The fall in consumption was the worst since the third quarter of 2011, while the drop in corporate investments was the worst since early 2012.

Considering that financial conditions stabilized in January and started to ease in February and March, such poor numbers signal a more pessimistic growth outlook among Brazilian corporations. The continuous fall in consumer and business confidence in April and May should make things even worse.

“The combination of declining domestic demand and growing inventories is clearly bad news,” said Barclays Capital economist Marcelo Salomon.

With both business and consumer confidence declining strongly in the second quarter, businesses are likely to reduce inventories by cutting production even faster than expected, which will eventually hit the labor market and reinforce the negative sentiment in Brazil.

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