Caution Against Excessive Optimism Regarding Growth in 2017

BRAZIL ECONOMICS - Report 20 Feb 2017 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

With the publication of the latest IBC-Br, the probability has increased that GDP contracted in the last quarter of 2016, with a decline for the year of around 3.5%. Although the economy should start to recover shortly, something more will have to occur for GDP to grow more than 0.5% in 2017. In this report we analyze the reasons for this forecast, focusing in particular on the effects of recomposition of inventories. A priori, it is not possible to discard the hypothesis that at the start of the recovery, production can “take the early lead”, with a buildup of stocks in readiness to meet the envisioned demand growth. But for this recovery to be sustained, the forecasted demand surge would have to be borne out, and the current perspectives on this count are not that favorable.

The newly published IBC-Br indicates that GDP in the fourth quarter of 2016 contracted. How much? If the seasonal adjustment is done using the monthly IBC-Br data, the estimated contraction of GDP works out to 0.4%, but if the IBC-Br is converted to quarterly frequency and its seasonal adjustment is performed using the method by which the IBGE adjusts GDP, the estimated decline is 0.8% (Graph 1). When the final GDP figures for 2016 are announced, negative contributions will almost certainly be confirmed for industry and services, along with drops in the investment rate and household consumption. In turn, net exports will make a negative contribution to growth, with exports falling by slightly under 2% in relation to the third quarter versus rough stability of imports.

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