Banks forecasting two years of economic contraction for Brazil

Banks in Brazil are now forecasting economic contraction in 2016 and if this proves correct it will be first time Latin America's largest economy shrinks two years running since the Great Depression.

Last Friday, Credit Suisse’s economist Nelson Teixeira put out a note revising his forecast for Brazilian GDP this year to -2.4% from an already bleak -1.8%.

Brazilian central bank’s weekly Focus survey points out that the country's biggest banks are all bearish. Only Banco Santander Brasil is bullish, by a hole basis point. They expect a 1.9% contraction this year and a 0.1% gain in GDP next year.

If things continue in Brasilia the way they are with tax cut reversals and political crises, they are sure to lower Brazilian expectations as the latest FGV consumers' confidence index revealed.

Meanwhile, Brazil’s two biggest private banks are expecting a prolonged recession. Itau is forecasting a 2.2% contraction this year and 0.2% contraction in 2016. Its rival, Bradesco, sees the Brazilian economy dropping 1.8% this year and flat-lining next year.

However the situation remains volatile but if the political crisis worsens, such as a separation between the ruling Workers’ Party and its chief political ally, the Democratic Movement Party, or PMDB, or blockbuster legal discovery regarding the Petrobras scandal that implicates president Dilma Rousseff or her predecessor Luiz Inacio Lula da Silva — then sentiment will plunge and even political impeachment should not be discarded.

Likewise a weak commodities' environment does not bode well for Brazil’s commodity exporters. This means less dollars flowing into the country from that source. A stronger dollar globally also threatens the local currency, the real, which is now closer to R$3.5 than it was to R$3.0 only a few weeks ago. Nevertheless a cheaper Real and Brazilian costs should help boost exports.

Brazil is currently the worst performing of the big BRIC markets over the last year.

Teixeira at Credit Suisse told the Estado de São Paulo newspaper on Friday that third and fourth quarters are likely to contract, which led him to revise his 2016 forecast lower. Next year is starting off on the wrong foot for Brazil.

Merco Press |

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