Brazil: Bottoming out? Not yet
Although we await the latest quarterly GDP statistics, recent high-frequency data suggest a fifth consecutive quarter of recession, as the political noise drives private sector confidence to new lows (see our Economic Insight Brazil Did Not Need More Drama Right Now). President Dilma Rousseff was suspended for a period of up to 180 days after the Senate voted to put her on trial and Vice President Michel Temer assumed the role of acting head of state last week. The uncertainty surrounding the impeachment procedure is detrimental to economic activity. Indeed, the growth indicator calculated by the Central Bank showed -6.3% y/y in March, as retail sales surprised on the downside. Our central scenario is materialising (see our Country Report Still in Deep Recession in 2016). After a surge of +25% in 2015, business insolvencies are expected to increase strongly again, by +22% in 2016 (the world’s worst performer) and the trend for large companies is of particular concern, at +92% y/y over the 12 months to March 2016. Our GDP forecast is -3.5% in 2016 but risks are on the downside as unemployment was 8.2% in February, compared with 5.8% a year earlier.
Central & Eastern Europe: Mixed Q1 GDP growth
First estimates indicate that real GDP growth in the group of 11 EU members in the CEE region lost momentum, falling to around +3% y/y in Q1 (+3.8% in Q4 2015). Hungary surprised markedly on the downside as Q1 growth fell to just +0.7% y/y, while Poland (+2.5% y/y) and Latvia (+1.3% y/y) also performed below expectations. These three countries experienced much reduced construction activity. The Q1 growth slowdown in the Czech Republic (+3.1% y/y) was expected after the marked rebound in 2015, while Bulgaria (+2.9% y/y) showed robustness. Q1 growth in Slovakia (+3.6% y/y) fell slightly but remained strong as a result of robust construction activity and automotive sales. Romania surprised again on the upside, with strong domestic demand pushing growth to +4.2% y/y. Euler Hermes expects regional growth of the 11 EU members in the CEE will ease to around +3% in 2016 (+3.4% in 2015). Meanwhile, the contraction of GDP in Russia slowed to -1.2% y/y in Q1, mainly as a result of base effects, as expected. We expect full-year GDP will fall by -0.9% in 2016 (-3.7% in 2015).
Japan: Q1 GDP better than expected?
GDP growth in Q1 was +0.4% q/q (-0.4% in Q4 2015) supported by a rebound in private consumption and an acceleration in public expenditure (both government consumption and public investment). Private investment contracted for the second consecutive quarter, with a decline in both non-residential and residential sub-components. External trade supported growth, with rising exports. Advanced indicators point to sluggish growth; the Bank of Japan Tankan survey and the Markit/Nikkei survey both suggest weaker business conditions in Q2 (low new orders). Consumer confidence is at a low level. Against this background, the authorities are considering further supportive measures. In addition to the relief package for the region affected by the recent earthquake, an additional fiscal package (equivalent to 1% of GDP) is likely. This will support domestic demand growth and help alleviate the adverse effects of the JPY appreciation, including reduced price competitiveness, weaker overseas investment and increased deflationary pressures. Expect GDP growth of +0.7% in 2016 (+0.6% in 2015).
The Netherlands: Building up
GDP increased by +0.5% q/q in Q1, an improvement on the previous quarter (+0.3% q/q) and the highest since Q1 2015. The main contributor to growth was investment in construction, which increased by +1.4% q/q, confirming a durable recovery in the sector. Consumer spending picked up (+0.4% q/q) after two quarters of stagnation, particularly for durable goods and services. For industry, most sectors registered an increase, with the exception of mining production, which contracted by -20.4% y/y as a result of the decision in early 2015 to reduce natural gas extraction. Net exports contributed positively to GDP growth (+0.1pps) mainly a result of acceleration in exports of transport equipment but also exports of services. Weakness in the energy sector had a negative impact on exports of machinery and equipment, which contracted. In total, goods exports increased less rapidly than re-exports. Going forward, we expect GDP growth will be +1.5% in 2016 (after +2% in 2015), with domestic demand acting as the main growth driver, notably investment in construction.