Brazil economy facing volatility despite strong Q1 figures

Brazil’s economy expanded 0.8% quarter-on-quarter in Q1 and 2.5% year-on-year, but growth could slow down due to the floods still affecting Rio Grande do Sul state.

Annual growth was driven by the services and industrial sectors and the rate of investments, according to statistics bureau IBGE. The service sector grew 3% and industry 2.8%, while gross fixed capital formation increased by 4.4%.

The positive Q1 figures are crucial for the coming quarters, due to carryover effects.

But May’s unexpected extreme weather in Rio Grande do Sul state, the fourth most important in the country in economic terms, caused floods that inflicted massive damage and paralyzed the state’s economy, with likely effects on national economic activity.

"The first quarter of the year was very good, with very positive data on consumption and investments. However, it is still not clear what the economic effect of climate events in Rio Grande do Sul will be, and because of this, I'm not ruling out an economic contraction during the second quarter of this year," Luis Octavio Leal, chief economist at local asset management firm G5 Partners, told BNamericas.

“I decided to maintain a GDP growth forecast of 2.1% for this year, without revision, based on the better-than-expected scenario in the first quarter and the negative effects in the second quarter caused by the events in Rio Grande do Sul,” added Leal.

Leonardo Costa, an economist at investment firm ASA Investments, is projecting growth of 2.3% for the year.

"The coming quarters should see more volatility, considering the deleterious effects of the crisis in Rio Grande do Sul. The first effect felt should be a contraction, with economic activity ceasing for almost one month in the state, with an impact on industry, agriculture, in services, affecting 2Q24 data," he told BNamericas.

“Next, the reconstruction effort should support growth in the following period. Despite the state's small size in terms of total GDP, the scale of the tragedy was large enough to affect the national figure,” he added.

"In any case, this year’s Q2 and Q3 GDP data will contain more volatility, with a slowdown in the short term and reacceleration in the second half of the year," said Costa.