There are signs that policy stimulus is starting to take hold in Brazil. Retail sales are growing, car sales hit a record high in August and even output in the beleaguered industrial sector has started to pick up. On the basis of the (albeit limited) data released so far, it seems that the economy may have grown by around 2% y/y in Q3 (vs. 0.5% y/y in Q2). Even so, we still think that growth in Brazil will remain fairly lacklustre over the next year or so. For a start, the jump in car sales is probably due to forestalling ahead of the planned expiry of sales tax cuts due next month. More fundamentally, a number of supports to growth look shaky – credit is growing at an unsustainable pace, the currency still looks expensive and the economy is vulnerable to a fall in commodity prices.
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