- GDP declined less than expected in Q1 thanks to stronger export growth, but stronger contraction expected in Q2
- Inflation figures worse than expected due to higher food and administered prices
- Despite further contraction, we maintain our view that the Selic rate will be raised to at least 14% this year
Drop in economic growth
Economic growth fell -0.2% qoq and -1.6% yoy in the first quarter of 2015. Thanks to a stronger increase in exports, this was somewhat less than market expectation (-1.8% yoy). Compared to the previous quarter, exports rose 5.7%, which was the first positive figure for four quarters. While the external sector contributed positively to growth, internal demand fell further. Consumer demand declined 0.9% yoy, which was the first negative annual growth figure since September 2003. The decrease in investments rose from -5.8% yoy in Q4 to -7.8% yoy. On the production side, agriculture and mining continue to show substantial growth, whereas manufacturing, construction and retail experienced the strongest decline.
Stronger contraction expected in Q2
The first figures available for the second quarter point to a deepening of the recession. Industrial production fell -7.6% yoy in April, down from -3.5% in March. And after a positive figure in March, retail sales shrank again sharply in April. Nor is the picture bright for May PMI figures. The composite PMI fell from an already weak 44.2 in April to a 6-year low of 42.9. The services PMI showed the strongest decline, down from 44.6 in April to 42.5, while the manufacturing PMI fell only fractionally from a low 46 in April, to 45.9. According to the HSBC press release, the manufacturing sector showed sharp declines in both output and new orders, which resulted in a significant fall in employment as well. Indeed, the unemployment rate rose from 7.9% in March to 8% in April and could easily jump above 10% by the end of this year.
Although the positive contribution of the external sector will increase in the coming months, this will not be enough to compensate for the further decrease in domestic demand. Meanwhile, rising unemployment will add to the fall in consumption and there are no signs of a turnaround in investments. The tighter fiscal stance will also weigh heavily on this year’s growth outlook. We therefore maintain our forecast of -1% GDP growth for 2015.
Despite the sharp economic slowdown, inflation continues to rise in almost every category, reaching 8.5% yoy in May, up from 8.2% in April. Most of the price increases are related to the fiscal adjustment currently being implemented, as administered prices surged 14.1% yoy, after rising 13.4% in April. But non-administered prices were up as well, from 6.7% yoy in April to 6.8% in May. In the latter category, tradable goods prices rose from 5.6% yoy in April to 5.7% in May. Looking at individual items, electricity prices remain one of the main sources of inflation, while bad weather caused food prices to jump from 8.0% yoy in April to 8.8% in May. Although higher interest rates will do little to tame this type of price increase, it still could help to limit the secondary effects in a country were inflation indexing is still pretty much alive and well. We therefore believe that although the end of the tightening cycle is near, one or two more rate hikes are very likely. That could bring the Selic rate to 14% or higher by the end of this year.