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Recession in Brazil ending, exports driving rebound in economic activity

President Temer has managed to change much more in Brazil than was envisaged when he took office less than one year ago. Last week, a labor market reform to increase flexibility was passed in the lower house of Congress and a pension reform is expected to be put to a vote next week.

Both reform proposals have been watered down compared with the original proposals; however, they would still mark a huge rebound in the sustainability of public finances, which is mostly expected to e recognised by rating agencies if passed into laws, noted Nordea Bank.

Recession in Brazil is finally coming to an end. Following eight straight quarters of contraction and the biggest cumulative GDP drop in a recession since 1981/83, the monthly activity indicator up to February indicates to upbeat growth for the first quarter, both compared with the quarter and the year ahead.

The PMI manufacturing reading was back above 50 in April for the first time since January 2015, underpinning the opinion that the growth is expected to return to positive territory. Prices of commodity matters most in the medium term, whereas reforms are expected to have a positive affect only outside the current forecast period. Commodity prices are mostly responsible for the moderately upbeat growth outlook for this year and the next year, stated Nordea Bank.

Because of the severity of the downturn, the labor market is expected to continue weakening at least this year out. The jobless rate has already reached 13.7 percent and is likely to continue weakening moderately as firms shed more jobs.

Domestic demand is expected to be stimulated from the considerable fall in inflation that has already provided a boost to real wages. An outright rise in consumer spending is a few quarters away though. The effect on investment from the rebound in business sentiment might return investment growth to positive territory already at the start of the year.

Exports are pulling Brazil out of recession for now. In terms of value, exports rose 18 percent sequentially on a seasonally adjusted basis in the first quarter, the most rapid pace since early 2010. Even if a major portion of that rise was export prices, export is still expected to expand positively in volume terms, added Nordea Bank.

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