Synchronized global growth brightens Brazil's prospects

Generalized optimism about the global economy will help activity in Brazil and reinforce projections of economic recovery in 2018. According to economists, the positive external outlook and euphoria in global stock markets are boosting not only exports, which will benefit from higher commodity prices, but mainly financial conditions, which, at an expansionist level, allow stronger spending.

Calculated by UBS, the Financial Condition Index (ICF) is made up of nine indexes: stock exchange in real terms, real exchange rate, volatility index (VIX), long and short-term interest rates (five years and one year), inflation expectations, monetary aggregates, financial system loans and foreign direct investment in the country (IDP).

The indicator went into neutral ground in December last year and rose to 0.1 in January. Economist Fabio Ramos says the ICF is reflecting the global economy´s positive momentum and usually anticipates the trend of activity´s real indicators in about two to four months. According to his calculations, at current levels, the ICF points to a 4% expansion of the Central Bank´s Economic Activity Index (IBC-Br) in in the second quarter of 2018 compared with the same period in 2017.

As a result, the wave of optimism in global stock markets, anchored in expectations that world growth will be higher than currently forecast, reinforces the projection that the Brazilian economy will expand 3.1% this year, Mr. Ramos says. "And it begins to suggest that growth may be a little bigger than that."

On the most optimistic side of the market, Cristiano Oliveira, of Banco Fibra, estimates that GDP will grow between 3.8% and 4.1% in 2018, a forecast that, according to him, already embeds the help of exports to economic activity. The synchronized growth of developed and emerging economies will contribute to speed up global trade, which favors the rise of commodity prices and, therefore, terms of trade, he says. "Historically, Brazil has grown in periods of increased international trade."

The contribution of exports, already net of imports, is likely to be slightly negative to Brazilian GDP this year, Mr. Oliveira ponders, because the domestic recovery will increase the volume of purchases from abroad. In addition, last year the help from the external sector to GDP was atypically high because of record harvests, which are also partly exported.

Even so, Mr. Oliveira says, Brazilian growth will be favored by exports in 2018. The uncertainty generated by presidential elections could limit this positive effect, Mr. Oliveira says, but that is not happening. "The transmission channel would be the country risk, which is currently at the lowest level in recent years," he adds.

For Livio Ribeiro, a researcher at the Brazilian Institute of Economics of Fundação Getulio Vargas (Ibre-FGV), the foreign sector´s positive tide is helping control the market perception on domestic uncertainties, such as doubts about the Social Security reform. With the exchange rate, stock market and asset prices calmed down, the sense of urgency regarding the reform declines, Mr. Ribeiro explains.

For him, the main help from the foreign sector does not come from the export channel – which accounts for only 12.4% of GDP – but from the "wealth effect" generated by the appreciation of assets. A world with high growth, low interest rates and inflation is a relevant "tailwind" to domestic activity, Mr. Ribeiro says. "There is no price pressure out there and lower interest rates help discipline the exchange rate."

The weaker dollar compared with the real works as a boost to household demand, says Mr. Ramos, with UBS, with increased confidence as well as lower prices of goods and food linked to commodities. Investment is also encouraged as imported machinery and equipment become cheaper. "Money from exports also circulates in the economy."

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