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Brazil Economy - October 2017

Source: OPEC 10/25/2017, Location: South America

Trade was a supportive factor behind the Brazilian economyís return to growth in 2Q17 as exports increased 2.5% and imports dropped 3.3% y-o-y. Moreover, the first acceleration in private consumption in more than two years lent notable momentum to GDP growth. Private consumption grew by 0.7% y-o-y in 2Q17 vs. a 1.9% y-o-y contraction in the previous quarter. The Brazilian economy was in contraction since 1Q14 before moving out of recession in 2Q17 with growth of 0.3% y-o-y. On the other hand, efforts to streamline government consumption resulted in a 2.4% y-o-y decline in government expenditure in 2Q17. Gross Fixed Capital Formation (GFCF) also declined by 6.5% y-o-y in 2Q17 after a contraction of 3.7% in the previous quarter.

The countryís trade surplus widened in September to $5.2 billion, representing a 36.8% increase from a year earlier. Exports increased 18.1% y-o-y, supported by primary goods which increased by 30.2%. Manufactured products also grew by 12.4% in September. For the first half of 2017, the trade surplus increased by more than 53%, reaching $107.7 billion due to a record harvest of soy and higher prices for a number of main exports like iron ore, soy and oil.

In August, exports to China, Brazilís top trading partner, increased around 41% y-o-y. Imports, on the other hand, grew at lower rate of 8.0% y-o-y in August.

Inflation continued its quick easing trend, reaching its lowest level ever at 1.6% y-o-y in September. This represents a quick fall in inflation from Augustís 1.7%. To catch up with rapidly declining inflation, the central bank lowered its benchmark interest rate by a full 10 pp in September, which now stands at 8.25%. The unemployment rate posted its fourth back-to-back fall in August, registering 12.6% vs. 12.8% in July. The consumer confidence index improved in September to 84.3 from Augustís 81.4.

In September 2017, business conditions in the manufacturing sector continued to improve due to an ongoing production increase that reflects a continued rise in factory orders. Manufacturing production rose in September for the seventh consecutive month and by the fastest rate since May. The IHS Markit Brazil Manufacturing PMI stood unchanged at 50.9 in September.

The services sector has returned to growth in September as suggested by the IHS Markit Brazil Services PMI Business Activity Index which registered 50.7, up from 49.0 in August. The survey showed that output grew in September for the first time in five months, while new orders increased by the highest rate since April. While employment in the services sector continued to decrease in September, the survey showed that the pace of contraction was at its weakest in nearly two and a half years.

Household consumption and investment is anticipated to pick up next year due to low inflation and reduced interest rates. Brazilís GDP is expected to grow by 0.5% in 2017 and by 1.5% in 2018.

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