Brazil Weakness to Continue

WCN Editorial Team 15 Nov 2017 SOUTH AMERICA

In Brazil, construction activity declined 5.3% y-o-y over the first quarter of 2017 (the latest data available at the time of writing), as measured by real gross value added. As with elsewhere in the Latin America region, ongoing economic and political weakness has exacerbated the deteriorating business environment, weak investor confidence and reduced construction activity.

Factors such as austerity measures adopted by the government to reduce the budget deficit and ongoing corruption allegations against politicians have also had an adverse impact on the industry.

Timetric expects that this weakening trend to have continued throughout 2017, with an estimated full-year contraction of 6.4%.

Looking forward, however, the industry is expected to recover and record minimal growth from 2018, with 0.6% growth forecast over the year, supported by a gradual recovery in economic conditions and subsequent improvements in investor and consumer confidence.

Government efforts to revitalize economic growth through the implementation of flagship programs such as ‘My House, My Life’, Logistics Investment Program (PIL), Plano Decenal de Energia 2024 (PDE 2024) and the National Education Plan 2014–2024 are expected to support the industry’s growth over the forecast period.

Timetric expects real construction output growth to remain fairly weak over the remainder of the forecast period to 2021. Nominal growth rates are expected to be slightly elevated as inflation remains high.

Kick starting Infrastructure Projects

In November 2017, the government announced plans to resume some 7,000 construction projects with a total investment of BRL131 billion (US$40 billion) by the end of 2018. In the face of ongoing austerity measures, a number of publicly-funded infrastructure projects have been halted in recent years. However, the “Avançar” initiative will focus on restarting transportation and energy projects, as well as affordable housing under the “My House, My Life” program.

The announcement comes as the Michel Temer government seeks to shore up political support following recent instability, boost economic growth through increased public spending, and overcoming infrastructure bottlenecks to support private sector development.

Political Risk Abounds

Brazil has faced sustained political turmoil in recent years, following on from the 2015 impeachment of former President Dilma Rousseff, with Temer surviving a second congressional vote in October 2017 on whether he should be tried on corruption charges.

Despite Temer coming into power promising to revitalise Brazil’s ailing economy, economic and fiscal reforms have not come as fast as hoped. Nevertheless, increasing construction of affordable housing should help restore some faith in the government and show it is moving forward with a strong legislative agenda.

The county faces a general election in October 2018, which could derail or stall the current reformist agenda.

Brazil’s economy contracted 3.6% in 2016, but is expected to have picked up marginally in 2017 (growing by 0.7%) and will expand by 2.4% in 2018. The economy is emerging from a sustained recession, but the recovery is expected to be protracted. Consumer and business confidence is rising modestly, and agricultural exports have performed well over the course of 2017, but unemployment is expected to remain elevated for some time. Inflation has decreased significantly over the course of the year, largely on the back of lower consumer demand.

The economy remains fairly closed, which hampers competition and limits access to imported products for domestic industries. Nevertheless, ongoing domestic policy reforms from the Temer government to raise competitiveness will boost economic growth over the longer-term, and facilitate the adjustment towards a more open economy.

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