The expected reality check for 2019 has started to materialize. Retail sales stalled in February, confidence fell to pre-Bolsonaro election levels as his approval ratings dropped, and the unemployment rate is back above 12%. As for companies, although industrial production rebounded in February (+0.7% m/m), it contracted in y/y terms for the sixth straight month, and business confidence weakened. Political confusion (corruption allegations in Bolsonaro’s entourage, firing of a minister, disagreements with the House Speaker) and the first difficulties in the pension reform legislative process have also caused the Brazilian real (BRL) to follow a depreciating trend since the end of January, erasing almost all the gains made in the first month. The stock market rally is moderating after breaking the 100,000 points threshold (now around 96,000). As a result, we still forecast a sluggish recovery (+2% GDP growth this year) and painful and lingering pension negotiations which could raise borrowing costs again.
