Brazil's economy inspires growing optimism

The Brazilian economy grew more than expected in the second quarter of this year, boosting optimism about the expansion for the whole of 2024.

GDP increased 1.4% in the second quarter compared with the first quarter and was up 3.3% compared with 2Q23, according to statistics bureau IBGE.

"With the expansion being greater than expected so far this year, the growth forecasts for 2024 are likely to be revised by economists to a level close to 3%," Roberto Troster, former chief economist at banking federation Febraban and an economist at Troster & Associados, told BNamericas. 

Troster himself has made an upward review to his economic growth estimate for 2024 to 2.8% from 2.5%.

The GDP growth came thanks to the industrial sector, which expanded 3.9% in 2Q24, while the services sector was up 3.5%. On the other hand, the agriculture sector contracted 2.9% after having posted record figures last year.

Meanwhile, the investment rate reached 16.8% in the period, up from 16.4% in 2Q23, while gross fixed capital formation grew 5.7% year-on-year. 

"The Brazilian economy entered a virtuous cycle this year with an increase in exports, the investment rate and improvement in the labor market, among other positive aspects. The only point of caution to be mentioned is the growing increase in public spending that exerts pressure on the country's debt level. Amid the economic expansion, it would be prudent for the government to review spending, but I'm not sure how open the government would be to discuss cutting spending at this time," Troster said.

According to the central bank's most recent weekly survey of 100 economists, published on Monday, the average GDP growth forecast for this year was 2.46% and 1.85% for 2025.

"Economists will also have to make upward revisions to their estimates for next year's GDP, to something closer to 2.5%, due to the positive statistical effects of this year seen so far," underlined Troster.

The improvement in economic indicators, including the labor market, suggest that the central bank could be obliged to up the Selic policy rate. 

The government recently sent the budget proposal for next year to congress, intending to raise the monthly minimum wage 6.87% to 1,509 reais (US$270). 

The combination of the wage hike, rising public spending and strong economic indicators this year is likely to force the central bank to raise the Selic, currently at 10.5%, to contain potential inflationary pressures.

"The much stronger-than-expected Brazilian GDP figure for Q2, of 1.4% q/q, means that the economy now appears to be on course to expand by 3% over the year as a whole. The flip side is that it will heighten the central bank’s concerns about inflation and the probabilities have probably now tilted towards a 25bp hike in the Selic rate at the [central bank rate committee] Copom meeting later this month," said William Jackson, chief emerging markets economist at Capital Economics, in a research report for his clients.