Brazilian economy likely contracted heavily in Q4, likely to shrink again in 2016

Brazil's supply side economy activity index is expected to show that GDP in Q4 contracted 6.3% y/y and 1.9% q/q, as compared with the contraction of 4.5% y/y in Q3. But presuming the relatively stringer consumption demand in Q4, retail sales growth remained flat in Q4, as compared with the decline of 2.7% q/q in Q3. This leads to forecast a sequential growth in overall private consumption.  On sequential basis, other components of demand, including net exports, are expected to have negatively contributed to Q4 growth.

"On our forecast, therefore, the real GDP likely contracted 3.7% in 2015 while it grew 3.8% (3.1% yoy in Q4) nominally", says Societe Generale.

With the external and domestic sector stacked up, the Brazilian economy is likely to contract heavily again in 2016. Investment sentiment continues to be in a very bad shape, while the fiscal constraints of government are additionally complicating the already very weak investment outlook in the medium term. Currently, both monetary and fiscal policies are compelled to act counter-cyclically.

Declining investment has resulted in the fall of medium to longer term growth potential and will carry on impacting consumption and employment prospects. Improved external demand, commodity prices and structural reforms, which can help rebound investor sentiment, are the main factors that can help stimulate the economy. With lower commodity prices and no proper progress on the policy side, growth outlook for the medium-term continues to be significantly bleak.