Boston, MA -- (SBWIRE) -- 07/10/2013 -- Following a massive slowdown since 2011, we are expecting the Brazilian economy to rebound in 2013. This view is underpinned by our expectation that fixed investment will pick up over the coming quarters as the government increasingly pushes through projects in the penultimate year of the government's PAC II growth acceleration programme and in advance of the 2014 FIFA World Cup. That said, we continue to expect that a period of household deleveraging will constrain private consumption growth in the coming years.

Given our view for growth to accelerate while price pressures remain elevated in the coming quarters, we forecast 50 basis points (bps) of rate hikes to 8.00% this year, followed by another 50bps to 8.50% by end-2014. We have long highlighted that the above factors would force the Banco Central do Brasil (BCB) to hike the Selic target rate in 2013, a view which is beginning to play out following a 25bps hike in the bank's April monetary policy meeting.

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Major Forecast Changes

We have downgraded our 2013 real GDP growth forecast to 3.3%, from 3.5% previously, as economic activity data remain relatively weak and we now anticipate a more substantial monetary tightening cycle in the coming months. That said, following real GDP growth of just 0.9% in 2012, we continue to anticipate a substantial uptick in economic activity this year on the back of a rebound in fixed investment growth.

While we had previously anticipated a modest improvement in Brazil's current account deficit this year, downgrades to our export growth forecasts, upgrades to our import growth forecasts, as well as little potential upside for the services and income account balances mean that we now expect a wider current account deficit of 3.4% of GDP in 2013.

With inflation likely to remain an important concern for the central bank in the coming months, we have moderated our forecasts for currency depreciation this year. We now forecast the Brazilian real to average BRL2.0000/US$ in 2013, modestly stronger than BRL2.0700/US$ previously. In addition, we forecast the unit to end 2013 at BRL2.1000/US$, up from BRL2.1500/US$ previously.

Key Risks To Outlook

Downside Risks To Growth Forecast: Should fixed investment growth disappoint in 2013 on the back of project delays, as it did in 2012, economic activity could remain weaker than we currently expect in the coming quarters. This, combined with persistently high inflation eroding consumers' purchasing power could see real GDP growth underperform our 3.3% forecast for this year.

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