skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

21 May 2019

Brazil: GDP Growth Momentum Sputters

By Paulo Clini, Adauto Lima

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Western Asset recently cut our 2019 GDP growth outlook for Brazil to 1.3% from 1.9%. The move came on the back of weaker-than-expected data for 1Q19, and underscores the frustratingly sub-par pace of expansion over the last three years. As a comparison and according to a central bank survey, the consensus forecast has downshifted to 1.2% currently, from 2.5% as of year-end 2018. Importantly, our revised forecast still carries a negative bias, reflecting a slew of challenges facing the country.

First, the spillover impact of economic shocks continues to linger. Over the past year, there has been a series of negative events that weighed on domestic activity. Exogenous factors included Fed tightening, economic contraction in neighboring Argentina and most recently, trade tensions between the US and China. Domestically, the trucker drivers’ strike and the presidential election affected business sentiment.

Second, there remain significant hurdles to implementing the much-needed structural reforms. Notwithstanding the strong liberal credentials of President Bolsonaro’s economics team, the willingness and ability of the new government to build a stable majority in Congress, and consequently approve comprehensive reforms, are still in question. Indeed, further reform delays will present a drag on current growth and possibly on 2020 growth as well.

Third, the scope of accommodative policies is limited. Fiscal stimulus is unlikely for now. Former President Temer had previously approved a constitutional amendment, called the fiscal “expenditure ceiling” law, which set a limit for the growth of federal government spending to the prior year’s inflation rate. The resulting downshift in aggregate demand has not been offset by larger private sector growth. On monetary policy, despite the historically low level of the policy rate, market volatility and currency depreciation have tightened financial conditions.

We still see room for further cuts in the policy rate, by 50-75 bps from 6.50% currently. The soft patch in growth, coupled with well-anchored inflation expectations, will likely propel the central bank to reconsider its current “wait-and-see” approach. One interesting observation is that despite apparently strong monetary stimulus, capacity slack and high unemployment persist. In our view, we believe the assumption of Brazil’s neutral rate, r*, could have fallen by more than the central bank’s assumption, resulting in less stimulus than is anticipated.

Our key investment implication is centered on the appeal of local rates, particularly in the front end of the nominal curve. Further easing has not yet been priced in. Regardless of the outcome and the time of economic reforms, we believe additional rate cuts are necessary to counter the cyclical growth challenges. We are also constructive on long-term, inflation-linked securities.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.