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DE RUEHSO #0265/01 1261048
ZNR UUUUU ZZH
R 061048Z MAY 09
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INFO RUEHBR/AMEMBASSY BRASILIA 0312
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RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000265 
 
SIPDIS 
SENSITIVE 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
STATE PASS NSC FOR ROSSELLO 
DEPT OF TREASURY FOR LINDQUIST 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: Brazil: Morgan Stanley's Dismal View of 2009 Growth 
Prospects: Outlier or Leading Indicator? 
 
REF: Sao Paulo 216 
 
SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary:  Economic growth in Brazil will fall to negative 
4.5 percent this year, Morgan Stanley country manager Daniel 
Goldberg told Ambassador Sobel in an April 23 meeting.  Goldberg 
cited low corporate confidence and weak industrial production 
numbers as the main drivers.  His firm expects unemployment rates to 
jump, creating negative spillovers into other sectors.  Although 
Morgan Stanley is definitely an outlier in its dismal economic 
forecast, the firm's pessimistic analysis does point to trends that 
could potentially deepen the crisis in Brazil.  The financial 
community's consensus GDP growth estimate, however, is for an 
economic contraction of approximately 0.5 percent.  End Summary. 
 
Morgan Stanley Pessimistic on Brazil 2009 Growth 
--------------------------------------------- --- 
 
¶2.  (SBU) Morgan Stanley country manager Daniel Goldberg told the 
Ambassador that if growth in Brazil were to remain flat for the rest 
of the year, the economy would contract by 1.5 percent for 2009 
overall.  According to Morgan Stanley, Brazil's economy contracted 
in the fourth quarter of 2008 at an annualized pace of 13.6 percent, 
the worst quarter in the country's history. (Note:  The quarterly 
growth rate was negative 3.6 percent.  End Note.)  Morgan Stanley 
predicts a 1.8 percent negative growth rate for the first quarter 
(based on preliminary data), negative 1.6 percent for the second, 
and zero growth for quarters three and four.  These numbers form the 
basis of their overall annual negative 4.5 percent prediction. 
 
The Gap Between Consumer and Corporate Confidence 
--------------------------------------------- ---- 
 
¶3.  (SBU) For Goldberg, the gap between consumer confidence and 
corporate confidence indicates the likely direction of the Brazilian 
economy.  Although consumer confidence remains relatively high 
(despite a decline since the crisis; see reftel)--98.5 points out of 
a possible 200, with 100 being average--he believes the lack of 
corporate confidence--now at 77.9 points--will eventually translate 
into massive layoffs, pushing unemployment to 12 percent or even 
higher.  (Note:  March unemployment reached nine percent.  End 
Note.)  As unemployment increases, Goldberg says this "meltdown" 
will lead to a massive economic contraction.  He maintains that once 
consumer confidence dips to numbers in line with corporate 
confidence, the economy could experience a deeper recession than 
Morgan Stanley's official prediction. 
 
¶4.  (SBU) In further support for their pessimistic forecast, Marcel 
Carvalho, Morgan Stanley's Executive Director for Research, 
published a paper citing a study from the Getulio Vargas Foundation 
(FGV) that stated that 18.5 percent of firms judge their inventories 
to be too high.  He maintained that inventory contractions were 
largely responsible for last quarter's massive decline.  Carvalho 
anticipates that firms will continue to reduce inventories, 
resulting in further production cuts and more layoffs. 
 
Morgan Stanley: Outlier or Leading Indicator? 
--------------------------------------------- 
 
¶5.  (SBU) Comment:  Among financial institutions, Morgan Stanley has 
by far the most pessimistic prediction for economic growth in 
Brazil.  Most other banks have taken a more optimistic view, most 
recently citing numbers as high as zero percent growth for 2009 
(Reftel), though it is important to note that over the last four 
months there have been consistent downward revisions of these growth 
forecasts.  Economic data continue to show a mixed bag, with recent 
retail sales numbers showing an increase of 3.8 percent (reflecting 
Goldberg's view that most consumers do not believe the crisis has or 
will seriously affect them), industrial capacity operating at 77.7 
percent (a low rate not seen since 1993), and a moderating labor 
market with layoffs actually decreasing (though job creation is 
still weak).  Taken together, the data support weak economic 
conditions in Brazil, though most financial analysts would argue 
 
SAO PAULO 00000265  002 OF 002 
 
 
that Brazil is well-positioned to confront the financial crisis. 
While Morgan Stanley's prediction of negative 4.5 percent growth is 
by far the most pessimistic opinion (three percentage points below 
the next lowest prediction and 4.1 points below the consensus 
average of all financial institutions), the consensus analyst 
forecast of slight negative growth (about half a percentage point) 
is more realistic than the Finance Ministry forecast of two percent 
growth.  End Comment. 
 
¶6.  (U) This cable was coordinated with and cleared by Embassy 
Brasilia and the Financial Attache in Sao Paulo. 
 
WHITE