Brazil’s real GDP likely to contract at lower magnitude in H1 2016, but downside risk remains

Brazil's real GDP growth contracted 1.4% sa in Q4 2015, as compared with consensus forecast of a contraction of 1.6% sa and Barclays' forecast of 1.3% sa contraction. The downward surprise in Q4 2015's real GDP was due to fixed-asset investment (FAI) and public spending, which fell 4.9% q/q and 2.9% q/q, respectively.

Meanwhile, consumer consumption was consistent with Barclay's forecast of a drop of 1.3% q/q sa. Net exports were also on par with expectations, even though t he composition was different from forecast. Exports fell 0.4% q/q, as compared with the forecast of a rise of 0.7%, whereas imports declined by 5.9%, as compared with the projection of a drop of 0.7%.

"We adjust our 2016 real GDP forecast to -3.1%, from -2.8% previously, driven by lower domestic demand expectations", says Barclays.

Domestic demand is expected to negatively contribute to the GDP, subtracting 5 percentage points, as compared with previous -3.7 percentage points. This is partly offset by the updated projections for imports that are likely to fall 13.4% y/y, which boosts the net exports contribution by 1.8 percent points to the headline GDP from the earlier projection of 0.9 percentage points.

Levels of confidence index indicate certain stabilisation at lower levels, implying that the worst is over. However, threats are still skewed on the downside. On a quarter-on-quarter basis, the real GDP is expected to shrink in H1 2016, but at a lower magnitude as compared to H2 2015. However, the economy is far from any recovery trend.

"We forecast that real GDP will contract 0.6% q/q sa in Q1 2016, led by household consumption and FAI. As a matter of fact, for the whole year, these two should be the main drivers, as they are expected to fall by 3.5% and 11.9%, respectively, contributing negatively to real GDP by -2.3 and -2.1pp", says Barclays.