More shadows than bright spots in Brazil's recovery.

Author:De Haro, Jose Luis

Latin America's biggest economy is also its biggest drag. A myriad of macroeconomic and political challenges have sunk Brazil's growth projections, which now is expected to get trapped in a recession this year. According to the International Monetary Fund, Brazil's GDP will contract 1.02 percent this year, and the country will expand less than one percent in 2016.

Economic data during the first quarter showed a substantial contraction in domestic absorption. "Consumer confidence remains at a record low level, and real income growth is now shifting to the negative zone," explained David Beker, Chief Brazil economist at Bank of America Merrill Lynch. According to his estimates, shared with Latin Trade, inflation is approaching 9 percent, and the government is putting an end to tax breaks on consumption.

In addition, the economic team recently signaled the fiscal adjustment will last more than one year, and the monetary authority is committed to bringing inflation to the target midpoint by 2016, requiring for that a substantial monetary tightening--detrimental for economic activity.

"We have revised down our GDP growth forecast for the next two years, now expecting the economy to shrink 1.8 percent in 2015 (vs. -1.3 percent previously), followed by a modest 0.7 percent recovery in 2016 (vs +1.2 percent previously)," Beker said. "The inflection point in economic activity is strictly dependent on a rebound in confidence levels. All indicates that this turning point will now happen later than expected, which explains why we now expect lower growth for both this and next year", he added.

His views on Brazilian recovery are not far from those at HSBC. "The recession gained momentum during the second quarter, and in light of different leading and coincident indicators in recent months, we are lowering our forecast for GDP growth in 2015 from -1.2 percent to -1.6 percent," Constantin Jancso, an economist at HSBC Bank Brasil told Latin Trade.

In the midst of a recession, that should move into a low growth in the fourth quarter, but political noise should remain the norm. The continuation of the fiscal policy adjustment should pave the way for lower interest rates, an opportunity for equities amidst an otherwise...

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