Brazil to contract in 2015

Growth in Brazil has slowed markedly as the commodity boom has faded and weakened the outlook for investment demand from the commodity-dependent industries. 

The lower crude oil price is on balance only slightly negative for Brazil but the plunge in prices for iron ore and soya beans hurts Brazil substantially.

Because of weak public finances and weak external balances, fiscal and monetary policy have been tightened. This has worsened the slowdown in growth. Fiscal policy has mainly been tightened by cutting subsidies and allowing administered prices to increase.

IPCA inflation in February accelerated further to 7.7% y/y, from 7.1% y/y in January. The increase in inflation was to some degree driven by increases in administered prices but the plunge in the BRL is also adding to inflationary pressure.

Danske Bank notes its forecasts as follows:

We expect GDP to contract in 2015 on the back of tighter fiscal and monetary policy and weak investment demand in commodity-dependent industries. We expect a moderate recovery in H2 15 but, compared with Brazil's recent boom years, we believe the outlook for growth will remain subdued as long as commodity prices do not recover.