Country Report Brazil October 2009

Summary

With the economic recovery gathering momentum in the run-up to the October 2010 election, the ruling PT will be better placed to gain a third term. The outcome is currently too close to call but broad policy continuity is likely.
Dilma Rousseff (PT), Lula's preferred successor, will benefit from the transfer of his popularity, but Jose Serra, the likely PSDB candidate, currently leads her in the polls by 15-20%, owing partly to his higher public recognition.
Despite staging a recovery from the second quarter, GDP will be flat in 2009 as a whole (revised from a contraction of 1% in our September report, following stronger than expected GDP in the second quarter).
GDP will grow by 3.8% in 2010 (revised up from 3.3% last month), as we now envisage a firmer domestic-demand-led recovery, buoyed by public spending ahead of the elections and the lagged impact of monetary easing.
A cyclical decline in fiscal revenue and tax breaks will erode the primary surplus to 1.5% of GDP in 2009, before a pick-up in revenue with the recovery lifts it to 3.1% by 2011. Lower interest payments will curb the overall deficit.
Assuming the Real is relatively stable and no supply shocks, we expect inflation to fall to 4.1% by year-end, and to remain stable in 2010-11 as higher wage agreements contribute to keeping inflation from easing to OECD levels.
After narrowing to 1.1% of GDP in 2009, the current-account deficit will widen mildly in 2010-11 to 1.5% of GDP in 2011, as the trade surplus narrows.

With Ms Rousseff languishing in the polls, Lula has shifted the campaign strategy, encouraging her to raise her profile in social programmes.
The government submitted to Congress its proposals governing the exploration of new oil reserves in 72% of the "pre-salt" area that has yet to be auctioned, envisaging a greater role for the state and Petrobras.
Interest rates were kept on hold at 8.75% in September. Fiscal results point to a 1% of GDP shortfall in this year's 2.5% of GDP primary surplus target.
GDP grew by 1.9% in the second quarter on a quarter-on-quarter basis, driven by a 2.1% rise in private consumption. Investment stagnated and has yet to recover from the collapse in the previous two quarters.
Industry posted the fastest quarterly growth rate, reflecting a partial recovery after sharp falls previously; while the resilience of services continued.
Wage settlements of 8-10% in the auto industry underscore inflationary pressures in Brazil in contrast to global deflationary trends.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60;70
NAICS Code: 52;72