Early 2025 Growth Momentum Brightens Brazil’s Economic Forecast

BRASILIA: Brazil's economy experienced a significant rise in the first quarter, even with increasing interest rates, as robust fixed investments, consumer demand, and solid agricultural production supported the activity, boosting full-year growth predictions and raising speculation regarding another rate increase. The largest economy in Latin America saw its gross domestic product increase by 1.4 per cent in the first quarter of the year compared to the previous quarter, according to the government statistics agency IBGE on Friday, matching the expectations from a Reuters survey of economists. This signalled a significant increase following a less-than-anticipated conclusion to 2024. IBGE adjusted fourth-quarter growth to 0.1 per cent, a decrease from the earlier reported 0.2 per cent.

XP economist Rodolfo Margato stated that in addition to the anticipated increase from agriculture, data indicated strong domestic demand, sustained by positive developments in employment, income, and credit. Consequently, he mentioned that he anticipated increasing his GDP growth projection for 2025 from 2.3  per cent. "We anticipate a fresh surge of upward adjustments from the market." "In our situation, we were already more hopeful, but our perspective might now align nearer to 2.5 per cent," stated Margato. William Jackson, lead economist for emerging markets at Capital Economics, stated that Brazil's economy is expected to expand approximately 2.3 per cent this year, an increase from his earlier estimate of 1.8 per cent. He stated that the strong growth might postpone the conclusion of interest rate hikes by the central bank's monetary policy committee, referred to as Copom. "The robust domestic demand indicated in the expenditure analysis implies that Copom is likely to contemplate one last 25-basis-point increase in the cycle," he noted.

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Earlier this month, policymakers indicated the possibility of additional actions after implementing a 50-basis-point hike to combat inflation exceeding the official 3 per cent target. Their remarks regarding maintaining interest rates at a high level for a prolonged duration led many to speculate that their cycle of tightening had concluded. Agriculture excelled on the supply side, achieving a 12.2 per cent increase from the prior quarter, driven by a record soybean harvest, Brazil’s main agricultural export. Services, accounting for about 70 per cent of Brazil's economy, grew by 0.3 per cent in a tight labour market, whereas industrial production decreased by 0.1 per cent.

On the demand side, investments indicated by gross fixed capital formation saw a notable increase of 3.1 per cent compared to the previous quarter. Household consumption added 1.0 per cent growth, bolstered by initiatives from leftist President Luiz Inacio Lula da Silva aimed at increasing disposable income, such as a rise in the minimum wage. Government expenditure rose by 0.1 per cent. The robust economic results occurred even with the central bank's strict monetary restrictions, which have increased the benchmark Selic interest rate by 425 basis points since September, reaching a nearly 20-year peak of 14.75 per cent. The government anticipates that rising interest rates will put more pressure on economic activity in the latter half of the year, forecasting GDP growth to decrease to 2.4 per cent in 2025 from 3.4 per cent in the previous year. Brazil's GDP grew by 2.9 per cent in the first quarter of 2024, falling short of the anticipated 3.2 per cent rise because of adjustments for earlier quarters.