Investors breathed a sigh of relief this morning as the Brazilian economy escaped a technical recession, posting 0.4 percent GDP growth in the second quarter of 2019. Shortly after the news, Brazil’s benchmark stock index Ibovespa rose 1,000 points and is currently operating  1.13 percent up for the day. However, despite slightly better than expected results, the Brazilian economy still has a long way to go to reach full recovery.

</p> <p>Despite the slim margins, the results still surprised specialists, who expected growth of 0.2 percent in comparison to Q1. Quarterly performance was boosted by industry, which grew 0.7 percent over the same period.&nbsp;</p> <p>“The results were surprising, considering some of the projections even expected GDP to contract. The <a href="https://brazilian.report/money/2019/04/15/brazilian-industry-shrinking/">industry’s performance</a> was certainly good news,” said Camila Abdelmalack, an economist at CM Capital, to <strong>The Brazilian Report</strong>.</p> <div class="flourish-embed" data-src="visualisation/632440"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <h2>No recession: construction sector building a comeback</h2> <p>Looking at individual sectors, the transformation and construction industries led the way upwards. The latter rose 2 percent in the yearly comparison for the first time in 20 quarters, after being rocked by a steep decline in demand and corruption scandals connected to Operation Car Wash. Ms. Abelmalack highlights that it is too soon to say it is an inflection point for construction, but a recovery in a sector that traditionally requires a broad workforce may have very positive impacts.&nbsp;</p> <p>Gross fixed capital formation is up, rising 3.2 percent in Q2. Generally seen as a positive indicator for growth, it measures how much companies increased their capital assets, in the purchase of machinery, equipment, and construction material. Though there is not enough detailed information to draw conclusions, there is reason to believe the rise could be associated with the growth in the construction sector.</p> <p>Meanwhile, the extractive industry continues to lag behind, only one quarter after the Brumadinho dam collapse in January. The sector fell 3.8 percent in comparison to Q1.&nbsp;</p> <p>Agriculture, which has traditionally been the driving force behind Brazil&#8217;s GDP numbers, contracted 0.4 percent. As researchers from the Institute of Applied Economic Research (Ipea) stated in a report early this month, the sector has been affected by a slightly lower soybean harvest.</p> <div class="flourish-embed" data-src="visualisation/632438"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>The services sector has risen 0.3 percent versus the first quarter, propelled by real estate, commerce and information and communication activities. The segment has now grown 1.2 percent in comparison to the same time last year. On the other hand, activities related to the public sector have shrunk 0.6 percent, amid a scenario of cash-strapped public accounts. As Ms. Abdelmalack explains, “there’s no way to think of government-led growth right now, it goes totally against the moment we’re living in. It is time to cut costs and rebalance the public accounts.“</p> <p>When looking at GDP progression over the last 12 months, an increase of 1 percent looks wholly positive for Brazil, which is still trying to claw its way back from a profound economic recession. However, yearly comparisons are unfit in this case, with last year&#8217;s truck drivers strike skewing the numbers.</p> <h2>The positive cycle of optimism</h2> <p>Amid fears of a potential technical recession, 0.4 percent GDP growth comes as music to the ears of investors and analysts. It is too soon to affirm the result is a turning point, but the positive signal is enough to create hope. After all, when it comes to economics, expectations are everything. Just look at financial markets: <a href="https://www.infomoney.com.br/mercados/acoes-e-indices/noticia/9177236/ibovespa-futuro-sobe-forte-com-pib-e-alta-das-bolsas-internacionais-com-china-dolar-cai">Ibovespa</a> began its new bull market in 2016, when Brazilian GDP plunged 3.6 percent. </p> <p>&#8220;It creates a chain reaction,&#8221; said Ms. Abdelmalack. &#8220;People tend to be more positive after this result, which is important to recover confidence.&#8221;</p> <p>The Federation of Industries of the State of São Paulo (Fiesp) is among those showing optimism off the back of the Q2 results. In a statement, Fiesp president Paulo Skaf called the 0.4 percent growth &#8220;excellent news,&#8221; believing that Brazil has now &#8220;re-encountered the path to growth.&#8221;</p> <p>Despite the generally positive reaction to the Q2 GDP growth, Brazil does require some perspective. The country&#8217;s economy is still some way off pre-crisis levels, and the paltry 0.4 percent of growth is a long way off figures in the U.S., which recorded 2 percent GDP growth this morning.&nbsp;</p> <p>While a strong American economy could signal some room for investments abroad, the grim perspectives of the trade war between the U.S. and China—Brazil’s two most important trade partners—are making life tougher for emerging countries. In a moment of risk aversion, the country may have to rely on itself to get back on track.&nbsp;</p> <p>“The pension reform and other political agendas may unlock the economy when it comes to recovering credibility and investments. It’s a pity the foreign scene isn&#8217;t helping at the moment,” said the economist. 

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MoneyAug 29, 2019

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BY Natália Tomé Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.