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‘Brazil and India's first quarter GDP figures miss expectations’

Wednesday 4th June 2014

By Schroders' Emerging Markets Economist, Craig Botham 
 
Private sector drives Brazilian slowdown:
 
Brazil’s first quarter GDP came in at 1.9% year on year, narrowly missing City expectations of 2.0% and slowing from 2.2% in the final quarter of 2013. Weaker high frequency data in the quarter pointed to several causes: weaker industrial production as energy costs rose, falling business and consumer confidence, and high inflation all served to erode activity. On a quarter on quarter basis, GDP rose just 0.2%.
 
Looking at the breakdown of the numbers, the weakness looks to be spread across the private sector, with only government expenditure recording positive quarterly growth. Net exports suffered in particular, a combination of a stronger real and the drought which has reduced output and increased the import of fuel for Brazil’s thermoelectric plants.  A high cost of electricity has meant a number of firms in the metals and chemicals industries reducing production and selling excess power on the spot market instead.
 
With investment also contracting 2% year on year, the need for a change in policy is increasingly evident. Bottlenecks play a large role in driving Brazil’s inflation, now running close to the top of its target band, and it will be difficult to tackle without addressing supply side concerns. This data will only spur investor desire to see President Dilma Rousseff ousted in October’s elections.
 
Weak Indian growth reminds the new government of its task:
 
Indian GDP grew 4.6% year on year in the first quarter of 2014, narrowly missing City expectations of 4.7%, and unchanged from the final quarter of 2013 which was revised down. The disappointment, marking the eighth quarter of sub-5% growth, emphasises the need for policy overhaul from the new BJP government.
 
Looking at a breakdown of the numbers, manufacturing continued to decline, contracting 1.4% year on year after a 1.5% decline last quarter. That this comes despite the weaker currency, which should boost exports, speaks to the deeper seated problems faced by Indian industry. The recent appointment of Arun Jaitley as Finance Minister is a positive sign, but there are no quick fixes to structural problems. All new appointees have made the right noises so far, but July’s budget is the first chance to offer real concrete commitments to reform. A reduction in subsidies would be a good start.
 
On the monetary policy front, Reserve Bank of India Governor Raghuram Rajan's crusade against inflation continues, with policy remaining tight despite deteriorating growth indicators. Inflation has bounced back slightly after initial successes driven mainly by food price inflation; core CPI was unchanged at 7.8%. There are increased upside risks to inflation with the possibility of an El Nino weather system this year. Policy will have to remain tight, and with fiscal policy constrained by the need to tackle the deficit, growth will have to be driven by reform.
 





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