Brazil's rosy economic outlook not expected to last

Although Brazil’s economy performed better than expected in the first few months of the year, it is facing pressure from the impacts of the floods in Rio Grande do Sul state.

Economists made upward revisions to their projections earlier this year amid robust labor market indicators and expectations of drastic base rate reductions, with some even seeing potential for greater economic growth than last year, which was 2.9%.

However, the scenario has changed.

"My projection for GDP so far was for an expansion of approximately 2.1% this year, but I'm reviewing this and should cut this estimate in the coming weeks due to what's happening in the state of Rio Grande do Sul," Luis Octavio Leal, chief economist at local asset management firm G5 Partners, told BNamericas.

Rio Grande do Sul, the country’s fourth largest state economy, is experiencing unprecedented floods that have paralyzed economic activity, and infrastructure reconstruction and social programs for the affected population will require substantial fiscal efforts from the federal government.

"I had a GDP estimate of 2.2% for this year, already cut to 2.0%, but I will have to make further revisions, as the economic impacts of the floods in Rio Grande do Sul state seem greater than those estimated a few days ago," Roberto Troster, former chief economist at banking federation Febraban, told BNamericas.

The central bank's economic activity index (IBC-Br), considered a GDP proxy, increased 1.08% quarter-on-quarter in Q1, but it does not yet consider the impact of the floods.

And according to the bank’s most recent weekly survey of 100 economists, which also excludes the natural disaster, growth of 2.09% is expected for this year, up from 1.95% projected a month ago.

Base rate

Additionally, the central bank signaled that the base rate reduction cycle will not be as pronounced as capital market agents expected.

Earlier this month, the monetary authority opted for a smaller rate cut amid signs of inflation.

The Copom rate committee cut the Selic from 10.75% to 10.50%. This was the seventh consecutive reduction and the first of only 25 basis points. Monetary easing began in August 2023 with cuts of 50 basis points.

"The signs from Copom are now that the reduction cycle for the Selic rate will end higher. Before, I had a projection of the Selic ending the year at 9.5%, but now I believe that the central bank will close the current cycle with a rate of 10%," said Troster.