July 26, 2018 / 10:31 AM / 8 months ago

Strike hammers Brazil growth outlook; inflation spike to fade

BRASILIA (Reuters) - A nationwide truckers strike in the final weeks of May likely dragged down Brazil’s economic growth this year by nearly one percentage point, a Reuters poll showed, while only temporarily boosting inflation.

Brazil’s gross domestic product probably will grow only 1.7 percent in 2018, according to the median of 42 estimates by economists compiled by Reuters on July 17-24, down sharply from 2.5 percent in the previous poll. Estimates ranged between 0.2 percent and 2.8 percent.

That was the only substantial revision in the poll, which also covered four other Latin American economies, all of them expected to grow at rates similar to the ones in an April survey. Brazil is now seen likely to underperform Mexico in 2018 for a fifth straight year, bucking previous expectations that it could pull ahead as it emerged from its deepest recession in decades.

“It is now clear that the strike had a profound effect on the economic activity, both directly and indirectly by weighing on sentiment, and only a cursory impact on inflation,” said Newton Rosa, an economist at SulAmérica Investimentos.

His remarks suggest economists are finally reaching consensus over how exactly the protests, which lasted only from 21 May to early June but nearly paralyzed key corporate sectors, affected Brazil’s economy, Latin America’s largest.

Truckers protesting high diesel prices blocked key highways in the final weeks of May, forcing farmers to cull their flocks and dump spoiled milk.

A lack of access to inputs drove companies to cut production, weighing on several economic indicators from retail sales and industrial output to services activity.

The drag on economic activity continued even after the disruptions ended and is likely to keep a lid on growth even in 2019. Brazil’s economy is now expected to grow 2.5 percent in 2019, down from 2.7 percent in the previous survey.

Public support for the protests, which drove policymakers to introduce costly diesel subsidies even as they struggle to curb a growing budget deficit, raised doubts over whether the winner of this year’s elections will manage to curb growth of debt.

That probably drove companies to push back investment plans, fearful that it may take Brazil longer than expected to regain its investment grade credit rating, economists said.

Product shortages resulting from the strike drove inflation higher, which had remained stubbornly below the central bank’s target range for months. Economists say that spike is unlikely to last long because of the weak economy and double-digit unemployment.

“The (likely) temporary impacts of recent shocks are somewhat mitigated by a very negative output gap and anchored market inflation expectations,” Nomura economists wrote in a report.

The survey put the year-end inflation rate at 3.8 percent in 2018, only a tad above the previous estimate of 3.5 percent. The median forecast for 2019 fell 0.1 percentage point to 4.1 percent, holding below the midpoint of the central bank’s target range for next year of 4.25 percent, plus or minus 1.5 percentage points.

These results also highlight how clarity is emerging over the impact of the protests after months of heightened uncertainty.

The central bank has repeatedly stressed that the protests made it hard to distinguish temporary shocks from long-term changes to the underlying economic outlook. It said that economic indicators for May and June would play a key role in clarifying that distinction.

Accordingly, the dispersion of forecasts in Reuters surveys on inflation shot up in the wake of the strike but has since subsided, suggesting economists have fully incorporated that shock into their models.

Reporting by Bruno Federowski; Editing by Ross Finley and Steve Orlofsky

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