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Focus Turns To Brazil's Weakening Economy

Focus Turns To Brazil's Weakening Economy

Posted by Juan Gavasa on July 18, 2014

Now that the FIFA World Cup is no longer in town, economics and politics are back to the forefront in Brazil. It’s unlikely voters will punish incumbent president Dilma Rousseff for Brazil’s lackluster performance in the semi-final matches. Dilma can weather the national soccer club’s defeat. In Brazil, elections are always about the economy.

And Brazil’s economy is weakening, according to Central Bank preliminary forecasts released on Thursday.

The May IBC-Br index declined -0.18% month over month and -0.2% on the year, beating consensus but not giving investors much to cheer about. The IBC-Br is a monthly economic indicator from the Central Bank that is used by economists to help forecast quarterly and yearly GDP growth.

On Wall Street, the iShares MSCI Brazil (EWZ) exchange traded fund was down a little under 1% in the pre-market.

The Central Bank also revised their April growth number to 0.05% from 0.12%, confirming not only that growth is losing momentum but that the trend is steeper than many economists predicted, said Marcelo Salomon, an economist for Barclays Capital in New York. Salomon thinks the numbers will worsen in June.

Barclays’ preliminary industrial production forecast is for a 4.0% contraction in June, led by a 19% slump in auto production, capacity utilization levels falling to 30-months low and business confidence levels hitting five-year lows.

All factors accounted for, the June IBC-Br should fall a strong -1.3% monthly, dragging Barclays’ second quarter GDP forecast down to -0.5% quarterly growth from a previous estimate of -0.3%.

Economic weakness, coupled with middle class frustration with the Workers’ Party, could be Dilma’s undoing. Her party has been in the presidency now for 12 years and voters — mainly from São Paulo on south — are looking to give the Workers’ Party their walking papers in October.

However, the party remains a strong political force in the northern half of the country, which benefited greatly from the social welfare programs that took millions out of Africa-style poverty in states like Bahia. These states continue to be strongholds for Dilma and could hand her a victory.

“During the last few months, Rousseff has been handing out cash to the poor in a blatant attempt to buy votes,” said Peter Kohli, CEO of DMS Funds in Leesport, Pa. Though Dilma has not been actually handing out bags of cash to the region’s poor, social and development programs remain in tact as an important piece of Workers’ Party policy designed to eradicate poverty in the region.

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