Brazilian economic activity likely remained flat on sequential basis in July

Brazil’s second quarter economic data indicates that the economic activity continues to shrink at a rapid pace in annual terms, albeit it recorded its most solid sequential growth in June since the end of 2014. The growth was mostly driven by the sequential gain in industrial production this year, thanks to a weaker BRL and rebounded exports, said Societe Generale in a research note.

With the currency rebounding back in the past few months and the trade data worsening again in June and July, industrial output growth in July deteriorated a bit following the improvement witnessed in the second quarter.

Accordingly, economic activity in Brazil is likely to have remained flat on a sequential basis; however, it is expected to have shrunk 3.6 percent year-on-year in July, weaker than June’s rate, stated Societe Generale. Keeping the recent movements apart, the Brazilian economy is nearer to bottoming out and would possibly expand next year if sentiment continues to improve.

“We recently upgraded our 2016 and 2017 growth forecasts to -3.3 percent and 0.3 percent from -4.1 percent and -0.9 percent respectively following the quarterly investment gain in 2Q”, added Societe Generale.

However, the economy continues to be fragile given the subdued fiscal prospects, worsening labor market and challenging external demand situation. A solid investment rebound is unlikely in this scenario and thus there remain significant downside risks to the growth outlook in the near term, according to Societe Generale.