BRASILIA: Brazil’s economy worsened more than feared at the end of 2016, possibly paving the way for bolder interest rate cuts by its central bank.
Brazilian gross domestic product shrank at an outsized quarterly rate of 0.9% in the last three months of last year amid further weakness in consumption and a smaller contribution from net exports.
Household consumption fell for an eight consecutive quarter, by 0.6%, doubling the contraction seen over the previous three months, as high inflation and a weak jobs market took their toll.
However, imports rose by 3.2%, “signaling that domestic demand will soon stabilize”, Andres Abadia, senior international economist at Pantheon Macroeconomics said.
Gross fixed capital formation – the main measure of investment in the economy – also fell less rapidly, retreating 1.6% on the quarter after sliding 2.5% in the third quarter.
Exports were also better than in the previous quarter, although they did fall by 1.8% on the quarter.
So, despite the weak headline reading, “easing monetary policy, rapid and steady disinflation, improving confidence, and rising commodity prices are laying the ground for growth this year,” Abadia said.
Yet the recovery would be extended, precisely because of still high unemployment and poor wage growth, with fixed investment expected to take time to recover as well.
Hence, Abadia said: “these poor data open the door for bolder rate cuts in the near term; we expect 75bp at the next Copom meeting in April 12, but the likelihood of a 100bp has increased significantly.”
Abadia projected Brazil’s economy would grow by at least 0.5% year-on-year in 2017 after having shrunk by 3.6% in 2016.
As of 1333 GMT the US dollar was down 0.61% to 3.1184 versus Brazil’s real, having come down a long way from the highs of 4.09 that it hit on 22 January.
