Brazil's GDP to contract heavily in Q2 and 2015, outlook deteriorates for 2016

Brazil economy seems to be heading for a worse contraction until just a couple of months back. Both private and public consumption look in worse shape with the anticipated and significant fiscal drag from H2 and inflation set to continue to rise. 

"The economic activity index suggests that Brazil's supply-side economy contracted -7.3% qoq (annualised ) or -3.1% yoy in Q2. This prompts us to project Q2 GDP growth of -1.7% qoq (-7.0% annualised or -2.7% yoy for the non-seasonally adjusted series), which is not significantly different from our earlier forecast", says Societe Generale.

Moreover, data through Q2 show no evidence of investment bottoming despite some gains on the export front (in volume terms), primarily due to the depreciating currency. The lagged effect of higher interest rates will continue to exert downward pressure on investment, particularly in the current environment where confidence is extremely low. 

"Assuming the fiscal situation remains stressed and the unemployment rate continues to rise, the economy might contract -2.1% in 2015 followed by -0.1% in 2016. The only upside, at this stage, could be a potential revival through trade channels", added Societe Generale.