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terça-feira, junho 12, 2012

Brazil GDP and Selic Forecast Revisions

Brazil GDP and Selic Forecast Revisions
What Is 1Q12 GDP Really Telling Us about the Economy?


Source: Santander Maurício Molan and Fernanda Consorte

- Headline GDP disappointed—however, the recovery of the services and manufacturing sectors is already under way.
- Consumption is very strong, which does not corroborate the deleveraging thesis; however, weak investments (due to poor productivity and competitiveness) suggest lower potential growth.
- Demand/supply imbalance has increased and tends to be further inflated by government actions.
- We revised our 2012E GDP to 2.2% (from 3.5%), but we still expect a major recovery in 2013, when we expect GDP to grow 4.7%. Potential growth is currently much lower than we previously thought.
- Low inflation and disappointing headline GDP provide room for further monetary policy easing. We also revised our 2012E Selic to 7.75% (from 8.25%) and year-end 2013 forecast to 9.25% from 9.75%.

Introduction: Off to a Bad Start
No doubt Brazil's first quarter headline GDP figure disappointed, particularly as it defined a much lower-than-expected carry-over for 2012 statistics, triggering across-the-board forecast revisions. Growth measured by year-on-year quarterly averages (the most common figure followed in Brazil) is heavily dependent on output performance at the end of one year and the beginning of the following one, as this period sets the departure point for the numerator to be completed by following the quarter's releases. Even our economic forecast, which has recently been more optimistic than consensus regarding the performance of domestic demand, will have to be adjusted after results surprised us.
The following chart illustrates the carry-over effect. Maintaining our QoQ sa forecasts at 0.7%, 2% and 2% for 2Q12, 3Q12 and 4Q12, respectively, and adjusting 1Q12 from 0.7% (our expectation) to 0.2% (actual figure) resulted in declines in average forecast growth from 3.5% to 2.7%.

But beyond the headline and carry-over effects, a deeper analysis of the GDP report suggests that the current state of Brazil's economy is not as negative as originally thought, and the recent trend seems benign: (1) the industry and services sectors performed well (were it not for the negative 7.3% reading of the agriculture sector due to crop loss, QoQ sa GDP would have posted a 0.9% [3.7% annualized] increase); (2) household consumption remains strong; and (3) domestic demand is accelerating (actually, increasing supply/demand imbalances).

In terms of monetary policy, figures suggest domestic absorption is accelerating, while supply and potential growth seem to be converging toward a much slower pace. Further stimulus measures (including interest rate reductions) will probably be adopted, as uncertainties and downside risks for headline GDP remain. However, we see increasing risks for inflation after 3Q12 (when most of the benign effects of lower public tariffs will favor a lower IPCA).

Decent and Improving Performance of Industry and Services
Surprising figures came in from the agricultural sector due to soybean crop losses, which reduced the 1Q12 QoQ sa GDP figure by some 0.5 p.p. Although a permanent loss for average 2012 GDP, this event will not likely be repeated in future readings. On the contrary, given that the performance of agriculture in the second quarter is relatively independent from what took place in the first quarter, we should expect an important positive contribution in the upcoming period.

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