Brazil’s Economy Seen Growing Less After Disappointing Quarter
Brazil’s economy unexpectedly contracted in the second quarter, leading economists to revise down their 2021 growth estimates as fiscal threats and a water crisis loom on the horizon.
Gross domestic product decreased 0.1% from the previous three-month period, compared with a 0.2% growth estimate in a Bloomberg survey. Only three of the 39 economists surveyed expected a negative number. From the year prior, the economy expanded 12.4%, the national statistics agency reported on Wednesday.
As the vaccination campaign advances with more than 60% of the population partly immunized, most businesses have resumed activities and services prices are picking up. Yet the informal labor market remains sluggish and consumer confidence won’t recover as fast as expected.
Investments fell 3.6% on the quarter, while agriculture dropped 2.8% and industry slipped 0.2%. On the other hand, services grew 0.7% and family consumption remained stable.
What Bloomberg Economics Says
The Brazilian economy lost steam in the second quarter despite some residual policy stimulus and a material advance in vaccinations. The small decline illustrates the challenges to come as monetary policy is tightened. A water crisis, fiscal uncertainties and political noise add downside risks to growth through next year. We forecast 5.1% growth for 2021 and 2% for 2022.
-- Adriana Dupita, Brazil economist
To read the report, click here.
The GDP numbers reflect how much of the stronger recovery seen earlier in the year was conditional to emergency cash handouts made by the government during the pandemic, according to Alberto Ramos, Latin America chief economist at Goldman Sachs Group Inc.
“This is a disappointing print which shows the underlying growth in Brazil is still very weak,” he said.
Ramos lowered his growth forecast for this year to 4.9% from 5.4%, assuming no major energy supply limitations and a broadly controlled pandemic going forward. Haitong Investment Bank also said it’s revising down its GDP estimates for 2021 and 2022.
Higher Rates, Water Crisis
Brazil’s aggressive monetary tightening campaign is starting to have an impact on economic activity. The central bank has already lifted the benchmark interest rate to 5.25% from an all-time low of 2% and is expected to bring it to 7.5% by the end of the year.
Meanwhile, inflation shows no sign of abating. It’s running at an annual pace of 9.3%, well above the 3.75% target, and economists continue to revise up their forecasts as a severe drought depletes hydroelectric reservoirs and drives electricity prices higher.
Read More: Brazil’s Inflation Outlook Worsens With Jump in Power Costs
Central bank chief Roberto Campos Neto said the economy’s second-quarter performance was “more or less in line” with the bank’s expectations and defended the need to keep raising interest rates, saying that runaway inflation would be even worse for growth prospects.
Swap rates on the contract due on January 2022, which indicate investor expectations for the benchmark rate, briefly fell after the data was released. They later rose along with the rest of the curve, reflecting bigger inflation fears.
Plans to expand social programs ahead of next year’s elections have also caused concern among investors, fueling expectations for tighter monetary policy.
©2021 Bloomberg L.P.