Brazil's economy outperforms expectations

As Brazil’s economy performs better than expected, economists are adjusting their full-year forecasts but see only limited room for base rate reductions.

Brazil registered Q2 growth of 0.9% quarter-on-quarter and 3.4% year-on-year, statistics bureau IBGE reported.

"Economic performance is better than expected and this is greatly influenced by the strong labor market and household income gains, thanks to the recent increase in the minimum wage," André Perfeito, chief economist at Necton brokerage, told BNamericas. 

In May, President Luiz Inácio Lula da Silva approved a minimum wage rise to 1,320 reais (US$270) from 1,302 reais.

Unemployment is also falling, with 7.9% in the three months ending in July, compared to 8.5% in the previous three-months period. 

"Due to the GDP results so far this year and the performance of the labor market, I am revising my GDP estimates from an expansion of 2.5% to at least 3% this year," said Perfeito. 

The positive performance rested mainly on higher household consumption and accelerating industrial activity, according to IBGE.

"We think growth will be weaker over the second half of the year, but given the Q2 figure and the resilience of some of the latest surveys, the economy is on course to expand by around 3.5% over the year as a whole," Capital Economics wrote in a report. The firm previously predicted 2.3% growth.

BASE RATE

August’s reduction of the Selic rate to 13.25% from 13.75%, starting a monetary easing cycle, will show positive results in the second half, according to Perfeito.

"We are going to start to see the investment rate increasing due to the reduction of interest rates, but I see limitations for a more aggressive reduction due to inflationary persistence and a weaker fiscal base for the government. The Selic reduction cycle will be limited to 10.75%," said Perfeito.