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Brazil Dodges Recession as Economy Grows Faster Than Forecast

Brazil Dodges Recession as Economy Grows Faster Than Forecast

(Bloomberg) --

Brazil’s economic activity rebounded in the second quarter, laying to rest concern that faltering confidence would drag Latin America’s biggest economy back into recession.

Gross domestic product rose 0.4% from the previous quarter, after a revised 0.1% drop in the three months through March, the national statistics agency said Thursday. The result was above the median estimate for 0.2% growth from economists surveyed by Bloomberg.

Brazil Dodges Recession as Economy Grows Faster Than Forecast

A positive second-quarter GDP result comes as welcome news after a slew of weak data raised speculation of looming technical recession. Still, the outlook is only for a meager pick-up this year; initial optimism about growth prospects for President Jair Bolsonaro’s first year dissipated, and significant acceleration is seen only in 2020, following passage of a make-or-break pension reform.

“Looking forward, it’s a positive figure but we need to continue monitoring because the recovery is very fragile and confidence is worsening, which could dent growth expectations,” said Flavio Serrano, chief economist at Haitong in Sao Paulo. “For now, we continue believing GDP will improve, but primarily in the fourth quarter.”

Second-quarter output was buoyed by a 3.2% jump in investments, following two consecutive declines. In addition to the low base from prior quarters, the increase was due to construction and domestic output of capital goods, according to Claudia Dionisio, who coordinates the GDP study for the statistics institute.

Rate Cuts

“Growth surprised analysts slightly on the upside, but it doesn’t change the overall picture: a sluggish recovery is keeping the output gap largely negative, which keeps inflation risks low,” said Adriana Dupita, Latin America economist for Bloomberg Economics.

Yet the data could increase caution among market players who have been expecting the central bank to maintain an aggressive pace of interest rate cuts, following a 50 basis points reduction to the key rate last month, she added.

Swap rates on the contract maturing in January 2021, the most-traded in Sao Paulo, rose 8 basis points to 5.72% as markets pared bets on future monetary tightening.

With the July cut to the central bank’s record-low benchmark Selic starting to feed through to lending rates, and overhaul of Brazil’s unsustainable public pension system -- a centerpiece of Bolsonaro’s economic agenda -- entering the home stretch to approval, investors may have more cause to deploy capital in the back half of 2019.

Companies investing in the second quarter have so far done little to reduce the double-digit unemployment rate. Family consumption, which accounts for nearly two-thirds of demand, rose 0.3%, the same pace recorded the prior period.

And with the government freezing expenses and trying to contain spending, demand from public spending took a nosedive, by 1%. That was the biggest contraction in more than five years.

Yet the upside surprise in headline GDP helped push the result accumulated over four quarters upward for the first time in a year, to 1%.

“The second-quarter data will stanch the wave of pessimism we were seeing in revisions of growth forecasts, and could bring about upward revisions,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil.

--With assistance from Rafael Mendes.

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net

To contact the editors responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net, Bruce Douglas, Robert Jameson

©2019 Bloomberg L.P.