Brazilian economic growth likely to lose momentum - Scotiabank

The most recent print of Brazil’s monthly economic activity is still solid, but some indicators are beginning to flash warning signs, such as April’s retail sales that came in weak, and consensus for the year is at +2.7 percent year-on-year – with a downward trend in more recent polls. This seeming slowdown in the Brazilian economy is probably what is stopping the BCB from turning more hawkish, in spite of the escalating risks on the inflation front, noted Scotiabank in a research report.

There are several factors that at some point might weigh on economic growth, possibly deteriorating in the second half of 2018: even without the BCB formally tightening, there has been a sharp move higher and a steepening of the Brazilian yield curve, which should hit still highly indebted households.

Also, higher inflation is expected to hurt consumer sentiment further into the year, as it is likely to erode wages. Moreover, uncertainty regarding elections and higher interest rates are also expected to negatively impact corporate sector.

“We don’t see these two shocks yet dragging growth below 2 percent, as base effects and high commodity prices should remain supportive, but they are enough to make us among the more pessimistic out there on growth prospects (we are 20bps below consensus for 2018, and 30bps below consensus for 2019)”, added Scotiabank.