The first quarter of 2019 ended with a decrease of 0.2% of GDP compared to the fourth quarter of 2018. It is not a dramatic figure, but confirms the slow recovery of the Brazilian economy.

This is the first quarterly decline since the end of 2016, going against the trend compared to two years of moderate growth.

Among the reasons indicated by economists to justify this negative figure there is, first and foremost, the uncertainty regarding the approval of the pension reform by the Parliament, which is above all curbing investments (household consumption has recorded a slight increase , saving the Brazilian economy from a more ruinous fall). Another cause reported by the economists is the Argentine crisis, which caused a significant decline in Brazilian exports; even the Brumadinho disaster had a significant impact on Vale production and on the mining sector in general.

But regardless of the specific causes, the impression is that Brazil has entered a kind of vicious circle: on the one hand, many companies have suspended their investments waiting for positive news on the front of accounts and public investments, on the other hand the government seems to be suffocated by low tax revenues and difficulties in getting the approval of reforms and interventions necessary to reduce the expensive public deficit.

In order to grow at a rate of 3% per year, investments should be around 22% of GDP: today they correspond to 15.7%. And the government has literally closed the taps of public investment, both at the federal level and at the level of individual states, overwhelmed by debts.

A sector that seems to go against the tide is the automotive one, which closed the month of May with a 5.6% growth compared to April and +21.6% compared to May 2018. The Anfavea, association of car manufacturers, remains optimistic despite the poor performance of the economy and estimates annual growth of + 11.4%.

Let’s see the update of some economic indicators.

GDP (Value added at market prices)

2013 2014 2015 2016 2017 2018 2019
GDP – real growth (%) 2,7% 0,1% -3,9% -3,5% 1,01% 1,30% 1,1%

The 2019 GDP growth forecast is still down: from + 2.5% at the beginning of the year we have gone to a current + 1.1%, the same result as in 2018. Some institutions already expect growth of less than 1%, but the Government counts with the approval of the pension reform by July to bring optimism back to the markets.


Inflation and real/dollar exchange 

2013 2014 2015 2016 2017 2018 2019
IPCA (IBGE – %) 5,90% 6,40% 10,7% 6,29% 2,95% 3,69% 4,03%

The forecast for 2019 inflation remained stable at 4%: almost stationary consumption, excess production capacity and high unemployment contribute to keeping prices under control even without the intervention of Banco Central.

2013 2014 2015 2016 2017 2018 2019
Exchange rate R$/US$ (end of the period) 2,34 2,66 3,90 3,25 3,25 3,75 3,80

The dollar is quoted today at R$ 3.86, down compared to the prices of a month ago (R$ 3.95). The market forecasts a listing of R$ 3.80 for the end of 2019 (it was 3.75 a month ago).

The euro is now listed at R$ 4.34, down compared to the strong appreciation recorded at the beginning of May (R$ 4.43).


Interest rate

2013 2014 2015 2016 2017 2018 2019
Nominal Interest rate (end of the períod) 10,00% 11,80% 14,87% 13,75% 7,00% 6,50% 6,50%
Real interest (deflactor: IPCA) 2,10% 4,20% 2,60% 6,91% 4,05% 2,81% 2,47%

The prediction of the discount rate (SELIC) at the end of 2019 is still stable at 6.5%. In this context it is difficult to think that Banco Central would risk lowering the SELIC to stimulate the economy. Also in this case, the node remains the approval of a pension reform that reduces the pressure on public accounts and allows a range of maneuver for a significant cut in the discount rate.


The Brazilian stock market (Bovespa)

Despite the negative result of GDP in the first quarter, the stock market is reacting positively to the change in mood of the Brazilian Parliament regarding the approval of the pension reform. Economy Minister Paulo Guedes is preparing a plan to help states in fiscal and cash crises, but in return he wants support in parliamentary voting. Even if we are still far from the majority of votes necessary for the approval of the pension reform, we are witnessing a convergence movement that should favor the government.

The Bovespa index is now around 97400 points, close to its all-time high.