Brazil: GDP contracts in Q1 for the first time since 2016
National accounts revealed that Brazil’s economic recovery stalled at the start of 2019, with GDP contracting in sequential terms for the first time since the 2015-2016 recession. Seasonally-adjusted GDP dropped 0.2% quarter-on-quarter in Q1, contrasting the fourth quarter’s 0.1% increase and in line with market expectations. A breakdown by components revealed broad-based weakness in Brazil’s economy, which was restrained by a limping domestic economy and bleak external backdrop.
Domestically, fixed investment continued to plummet in the first quarter, albeit at a softer rate than the fourth quarter’s result (Q1 2019: -1.7% qoq; Q4 2018: -2.4% qoq). Uncertainty both at home and abroad has suppressed investment, which continues to linger below its pre-recession level despite interest rates resting at record lows. Moreover, household spending lost ground in the quarter, with growth slipping to 0.3% from Q4’s 0.5%, although government consumption swung to a 0.4% expansion, contrasting Q4’s 0.3% fall.
On the external front, exports of goods and services contracted 1.9% qoq, notably below Q4’s 1.9% expansion. Subdued external demand weighed on the result, particularly from Argentina, one of the country’s key trading partners, which is mired in a deep crisis. Lower mining exports also took effect, partly the consequence of ongoing woes at Vale; the world’s largest iron ore production company was forced to close several operations in Q1 following a deadly dam disaster. Imports, in contrast, grew 0.5%, contrasting Q4’s sharp 6.1% contraction.
On an annual basis, growth more than halved from 1.1% in Q4 to 0.5% in Q1.
Looking ahead, growth is expected to stay soft this year, plagued by a challenging environment both at home and abroad. While improved sentiment and accommodative monetary policy should help fuel a modest acceleration, reform uncertainty and subdued external demand will limit the uptick.