Boston, MA -- (ReleaseWire) -- 02/17/2014 -- Further exchange rate weakness, still-high interest rates and our view for only a moderate pick-up in fixed investment inform our view that real GDP growth will remain near 2013 levels this year. Indeed, we forecast real GDP growth of 2.4% in 2014, only modestly higher than our 2.3% estimate for 2013.
Elevated inflation will keep interest rates high in H114, but we believe that a still-weak growth outlook, combined with more moderate price pressures, will see the Brazilian bank move to ease monetary policy in late 2014.
While the widespread public protests begun in June have largely subsided, we believe that this marked a turning point for the Brazilian electorate. As such, we anticipate that public unrest could flare up again should political progress on reforms stall.
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Major Forecast Changes
We have upgraded our 2013 real GDP growth estimate to 2.3%, from 2.0%, following indications that economic activity is likely to come in stronger than we previously expected in late 2013. That said, we modestly downgraded our 2014 real GDP growth forecast to 2.4% (from 2.5% previously). We believe that exchange rate weakness and still-high interest rates will temper private consumption growth, while delays will continue to weigh on the infrastructure sector's potential, implying little acceleration in growth from 2013 levels.
Following 325 basis points (bps) of hikes since April 2013, we anticipate only another 25bps to 10.75% in the coming months. After a pause, we then expect a still-weak growth outlook and more moderate inflation in H214 to prompt the central bank to cut rate to 9.75% by end-2014.
After more significant weakness than we expected in end-2013, and in light of growing capital outflows, we have revised our 2014 average and end-year exchange rate forecasts to reflect greater weakness. We now forecast the real to average BRL2.350/US$ in 2014 (from BRL2.300/US$ previously) and end the year at BRL2.450/US$ (from BRL2.380/US$).
Key Risks To Outlook
Downside Risks To Growth Forecast: A more significant tightening cycle than we expect in early 2014, combined with another substantial sell-off in the exchange rate could hit private consumption growth hard, posing downside risks to our 2.4% real GDP growth forecast.
Further delays to major construction projects related to the FIFA World Cup and PAC growth acceleration programme would also pose downside risks to our 2014 growth forecast.
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