Activity shifts into higher gear in Q1

The Brazilian economy fired on all cylinders in the first three months of 2024, following a sluggish H2 2023 performance. GDP rebounded, increasing 0.8% on a seasonally adjusted quarter-on-quarter basis in the first quarter, above the downwardly revised 0.1% contraction logged in the fourth quarter of last year. On an annual basis, economic growth sped up to 2.5% in Q1, following the previous period's 2.1% increase. Both the quarterly and annual improvements were the best results since Q2 2023; the former was largely in line with analysts’ expectations, while the latter overshot them.

The quarterly upturn reflected improvements in private consumption, fixed investment and exports. Domestically, private consumption bounced back, growing 1.5% seasonally adjusted quarter on quarter in the first quarter (Q4 2023: -0.3% s.a. qoq), which marked the best reading since Q2 2022; wage growth caught up with inflation in Q1, supporting purchasing power. Moreover, fixed investment growth picked up to 4.1% in Q1, from the 0.5% increase logged in the prior quarter, likely reflecting the beginning of the positive impact of lower interest rates. Less positively, government spending decelerated in Q1 and flatlined (Q4 2023: +0.9% s.a. qoq). Turning to the external sector, exports of goods and services increased 0.2% on a seasonally adjusted quarterly basis in the first quarter, which was above the fourth quarter's flat reading. Meanwhile, imports of goods and services growth picked up to 6.5% in Q1 (Q4 2023: +1.4% s.a. qoq).

GDP growth is likely to cool ahead, partly due to Q1’s unusually strong result and partly due to the fallout from the devastating floods that struck Rio Grande do Sul—Brazil’s largest rice-producing region—in May; higher food prices will likely cap private spending. That said, government spending will likely increase amid recovery efforts. Meanwhile, looking at the monetary policy outlook, the likely spike in food prices following the floods, along with Q1’s robust private consumption outturn, might prompt the Central Bank to take a more cautious approach ahead and lead it to temporarily pause its loosening cycle at its next meeting on 18–19 June—though our Consensus is still for another 25 basis points cut.

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