Economic Activity falls in May in Brazil

Economic activity in Brazil experienced a decline in May, as indicated by a central bank index released on Monday. This development suggests a non-linear growth trajectory for the country, despite analysts consistently revising their forecasts upwards for the year.

The IBC-BR economic activity index, a crucial gauge of gross domestic product (GDP), showed a seasonally adjusted decline of 2.0% compared to April, disappointing analysts who had expected zero growth, according to a poll.

This marked the largest monthly drop since March 2021. On a year-on-year basis, the observed data series recorded a 2.15% increase, resulting in an accumulated growth rate of 3.43% over the past 12 months.

Gabriel Couto, economist at Santander Brazil, attributed the disappointing outcome to the end of the contribution from the record grain production witnessed during the 2022-23 summer crops.

Finance Minister Fernando Haddad commented on the numbers, stating that they came in “as expected” in an environment characterised by persistently high borrowing costs. Haddad emphasised that the central bank’s intended economic slowdown has manifested strongly, cautioning about potential outcomes. He further highlighted that current real interest rate levels are imposing a significant burden on the economy.

The central bank has maintained its benchmark interest rate at a cycle-high of 13.75% since September to address inflationary pressures. However, it has recently indicated the possibility of a rate cut in August if the inflation scenario continues to improve.

Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, noted in a client note that the performance underscores the need for interest rate cuts. While several key economic sectors face pressure due to tighter financial conditions, low inflation, a resilient labor market, and favourable external conditions for Brazil’s key exports suggest that economic growth will not come to a halt.

Economists have continually adjusted their expectations for the performance of Latin America’s largest economy this year, particularly following a stronger-than-anticipated first quarter, driven by a thriving agricultural sector. However, due to seasonal factors, the farm sector is expected to decelerate in the second half of the year.

According to a weekly survey conducted by the central bank among private economists, GDP growth for 2023 is now estimated at 2.24%, a decrease from 2.9% in 2022, but still significantly higher than the approximately 0.8% initially forecasted at the start of the year.

Nevertheless, future expectations point to a slowdown in light of financial constraints and high borrowing costs.