Brazil’s Economy Grows Sour

If someone is of the mind that emerging markets are in the doldrums, Brazil is one of those countries that serves the example. Its currency is one of the weakest against the dollar this year. And its second-quarter GDP grew a paltry 0.2%. With unemployment still over 12%, economic stagnation does not bode well for a turnaround story in Brazil.

Many investors have been waiting for Brazil to turn the corner since Dilma Rousseff was impeached and indicted for breaching fiscal responsibility laws back in August 2016. Her vice president Michel Temer quickly moved to promote conservative economic policies, including making a market-friendly spending cap a constitutional amendment, Forbes reported.

Temer also passed other less blockbuster reforms, including some labor reforms. But the big changes to public pension plans are not even close to being made yet, rendering the spending cap moot.

Brazilians go to the polls in October. There is no clear front-runner. The leader in the polls, Jair Bolsonaro, has yet to crack his baseline 20% support level.

Political risk and a lackluster economy will continue pressuring the Brazilian real and the stock market.

Brazil’s Institute for Geography and Statistics, IBGE, also lowered first-quarter output from 0.4% to 0.1% on Friday.

To make matters worse, there is also a chance that Brazilian truckers will go on strike again as they did this spring as the battle of diesel fuel prices is not yet over, apparently.

Brazil’s year-over-year growth rate now stands at 1%, down from 1.2% year-over-year in the first quarter of 2018.

“The prospects for pension reform right now look poor. External conditions are not that great because of the China trade war, a flat-to-range-bound commodity cycle and a US Fed rate hike.

“The emerging markets to developed market growth differential are just not moving in the right direction for emerging markets, and Brazil is one of the worst,” says Bertrand Delgado, director of global markets at Societe Generale in New York. “The tougher external scenario also makes the Brazilian real vulnerable,” he says.

The fundamentals may look ugly in Brazil, but some investors are opportunistic.