Investment in Brazil

Brazil - Investment

Economy slips back into contraction in the second quarter

The economy fell back into contraction in the second quarter of the year, shrinking 0.1% on a seasonally-adjusted quarter-on-quarter basis and contrasting the first quarter's 1.2% increase. Q2's reading marked the first contraction since Q2 2020 and came in below market analysts’ expectations of a mild expansion. On an annual basis, economic growth accelerated to 12.4% in Q2 (Q1: +1.0% yoy), boosted significantly by a low base of comparison due to Q2 2020’s sharp contraction.

Q2’s mild downturn in quarterly terms was predominantly driven by a muted domestic economy. Household spending flatlined in Q2 amid high unemployment and as price pressures intensified, marking the worst reading since Q2 2020 (Q1: +0.1% s.a. qoq), while fixed investment contracted 3.6% in Q2, marking the first decline in a year (Q1: +4.8% s.a. qoq). Meanwhile, public spending rebounded mildly, growing 0.7% in the second quarter (Q1: -0.8% s.a. qoq).

On the external front, growth in exports of goods and services accelerated to 9.4% in the second quarter (Q1: +4.9% s.a. qoq), marking the best result in over a decade. Conversely, imports of goods and services declined 0.6% in Q2 (Q1: +10.0% s.a. qoq).

Commenting on the outlook for the Brazilian economy, Alberto Ramos, economist at Goldman Sachs, noted:

“We expect the economic recovery to advance further in coming quarters in tandem with further progress on the Covid vaccination front, renewed fiscal stimulus, and still supportive terms of trade and external backdrop in general. This should, however, be mitigated by rising interest rates, high inflation, high levels of household indebtedness, lingering supply chain issues plaguing several manufacturing industries, and heightened political noise and policy uncertainty.”

The LatinFocus panel of analysts see GDP expanding 4.9% in 2021, which is up 0.1 percentage points from last month’s estimate. For 2022, the panel sees the economy growing 2.3%.