Brazil brightens while India struggles, says Schroders’ Botham

Craig Botham, Emerging Markets Economist at Schroders, comments on Brazil and India’s GDP figures.

Brazil’s GDP growth for the second quarter rose to 3.3% year-on-year, against growth of 1.9% year-on-year last quarter and was much stronger than consensus expectations of 2.5%. Manufacturing, construction, retail and transportation were all key drivers in the rise in activity. Services as a whole grew 2.4% on the year, while industrial output expanded by 2.8% after contracting last quarter.

In contrast, Indian second quarter GDP was weaker than expected, growing by 4.4% year-on-year, down from 4.8% in the first quarter and worse than consensus expectations of 4.7%. The slowdown was fairly broadly based, but particular weakness was seen in manufacturing, which contracted 1.2% year-on-year after expanding 2.6% year-on-year last quarter.

Compared with our own forecast, the Brazilian data is better than expected, while India’s is slightly worse. We still expect a slowdown in Brazilian growth in the second half of 2013 given the central bank’s tightening cycle and weak recent activity data. For example, leading private business surveys are indicating falls in activity for July, while the consumption picture is becoming bleaker as high domestic inflation eats into households’ spending power. For India, the second half of the year seems unlikely to offer much relief now that oil prices are climbing again as tensions mount in Syria. However, the depreciation in the Indian rupee could support export activity.

Overall, the Brazilian numbers are good news for the government and central bank, Banco Central do Brasil. Strong growth allows the central bank to pursue its inflation target without government opposition. We expect the policy interest rate to rise to at least 9.5% by the end of this year. For India, the opposite is true. The choice between supporting growth and supporting the rupee is now starker than ever. The latest GDP figures raise further doubts over the credibility of a tight monetary policy, particularly before May’s election. The incoming central bank governor, Raghuram Rajan, will be watching with trepidation. For now at least, Brazil is basking in the sun, while India’s monsoon continues.

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