Why recession in Brazil is not imminent, but the short term will hurt
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Disappointing macroeconomic data may have left analysts overly pessimistic about Brazil
While overall, the PMI (Purchasing Managers Index) data seems quite disappointing, the situation could be much worse given what was reported for other countries such as China or Mexico. Emerging markets in general are taking a beating from reduced global demand and a strengthened dollar, causing foreign exchange losses for international investors.
In a sense, Brazil is lucky to be the world’s most closed economy, according to the World Bank, since this has helped the country weather the drop in global trade. Internally, though, Brazil’s high inflation has been stalling growth and preventing monetary easing by the central bank.
Some analysts, including Nomura’s Tony Volpon, claim Brazil may be about to go into a recession. Volpon stated, “Brazil may experience a recession by the end of this year.”
The main driver cited for the predicted recession is the impact that tighter monetary policy in the U.S. would have on the Brazilian economy. While we can’t rule out the possibility of a recession, it doesn’t seem as imminent at the moment. Nonetheless, the Brazilian equity market sold off after Volpon’s note, compounded by the weak PMI reading.
The stronger dollar has caused the Brazilian real to depreciate almost 10% since mid May, which has caused significant foreign exchange losses for international investors in Brazil. Given the persistent inflation, the currency is unlikely to gain strength anytime soon.
The government has taken a strong stance against inflation by raising interest rates to 8%, which was a more hawkish (aggressive) approach that what the market expected. Further tightening is likely, given the rising inflation numbers. A Selic rate of 9% by year end is more than plausible, yet if by Q3, growth hasn’t reignited, then economic growth will suffer.