Brazil Economic Forecast

The economy defied market expectations in Q2, with both quarter-on-quarter and annual GDP growth markedly overshooting projections. That said, sequential growth slowed from Q1, partly due to a base effect and the cumulative 1,175 basis points of Central Bank hikes cooling the economy. From the production point of view, Q2’s slowdown was chiefly due to the agricultural sector declining amid the base effect from Q1’s record harvest. Regarding expenditure, private spending growth accelerated in Q2, supported by softer price pressures, a falling unemployment rate and fiscal stimulus—such as increases in minimum wages and the Bolsa Família welfare program. In Q3, the economy should be stable in sequential terms. That said, in early September, a cyclone hit the south of the country, causing heavy flooding and likely hampering activity at the tail-end of Q3.

In July, inflation rose to a three-month high of 4.0% (June: 3.2%), surpassing the Central Bank (BCB)’s 3.25% target for this year and overshooting market expectations. Inflation will pick up in the remainder of 2023 from current levels due to lower interest rates, a weaker real, fiscal stimulus and higher fuel prices—with the latter partly due to the recent reinstatement of a federal tax.