Brazil Economy Soars Past All Forecasts as Bets on Interest Rate Hikes Grow
(Bloomberg) -- Brazil’s economic growth picked up much more than expected in the second quarter, powered by strong consumer spending, raising the prospect of interest rate hikes in the near future.
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Official data released on Tuesday showed that gross domestic product expanded a whopping 1.4% in the April-June period compared to the first quarter. The number surpassed all forecasts in Bloomberg survey of analysts that had a 0.9% median estimate — and was far more than what economists were predicting at the beginning of the period.
A surge in household spending, juiced by government transfers, has helped to deliver robust growth through the first half of the year, handing President Luiz Inacio Lula da Silva a political win. But it has also fanned fears that Latin America’s largest economy is running too hot.
“The problem is that the economy is overheating,” said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. “Growth is not healthy because it’s leverage by fiscal steroids.”
Swap rates on the contract due in January 2026, an indicator of market sentiment toward monetary policy at the end of next year, rose as much as 14 basis points in morning trading after the report showing strong growth.
What Bloomberg Economics Says
The release is “a welcome development as the government struggles to meet its underwhelming fiscal targets. From a monetary policy standpoint, the outsize GDP print signals there’s no slack in the economy, which could actually be growing above potential. That raises the risk of interest-rate hikes, especially if the currency weakens further ahead of the Sept. 18 policy decision.”
— Adriana Dupita, Brazil and Argentina economist
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Government outlays are steadily increasingly as the Lula administration attempts to improve living standards for poorer Brazilians. Many measures taken earlier in the year, such as January’s minimum-wage hike, continue to bolster demand amid tight financial conditions.
Combined with the hottest labor market in nearly a decade, Brazilians have been flush with extra cash to unload on goods and services. Their wallets also got some relief as the central bank lowered borrowing costs through the period, until hitting the brakes on its easing cycle and holding rates at 10.5% in June.
Family Consumption
All told, family consumption grew 1.3% in the second quarter compared to the previous three-month period. Industrial output, another major driver in the period, gained 1.8% while services were up 1%.
The report was the first GDP reading since floods devastated the wealthy state of Rio Grande do Sul, one the traditional centers of Brazil’s mighty agricultural sector, which was down 2.3% on the quarter, the statistics agency said.
Brazil’s GDP grew 3.3% from a year ago. The strong result led Lula to tout the data as a testament to his economic stewardship.
It’s “growth that adds to the increase in jobs, household consumption and a better quality of life,” the president wrote on his Threads page. “Without bravado or lies.”
Following the release, the Finance Ministry said it would raise its 2024 economic growth forecast from the current level of 2.5%.
Trade-Off
But price pressures are building. Traders are already betting that policymakers will raise borrowing costs by at least a quarter-point when they meet later this month.
Much of investors’ anxiety stems from the government’s struggle to provide assurances it can fight poverty without overburdening public accounts. The nominal budget deficit has ballooned to 10% of GDP in the past 12-months, from 6.8% a year earlier.
Lula’s economic team has worked on its 2025 budget as progressive allies push for more spending while financial markets demand more fiscal restraint. So far, their efforts have done little to ease concerns, causing a sell off in Brazilian assets in recent months, with the real among the worst performing emerging market currencies this year.
While growth seems likely to continue, tensions over fiscal policy are bound to get worse in coming quarters.
The trade-off of “public spending versus fiscal discipline will remain the defining feature of the Lula administration,” said Mario Braga, a geopolitical analyst at RANE, a consultancy. “The closer we get to the 2026 elections, the harder it will be for him to stick to these commitments.”
That portends to put more pressure on the central bank, which is preparing for succession as the term of Governor Roberto Campos Neto comes to an end this year. Last week, Lula named the bank’s Monetary Policy Director Gabriel Galipolo as his replacement, an appointment that the Senate will have to approve in coming weeks.
The choice has only kept markets on edge. Political observers say the central bank’s new leader will have to act fast to prove the institution won’t bend to Lula’s will, otherwise financial pressures will intensify.
The central bank is “going to have a hard time building credibility, especially its new president,” said Sergio Vale, chief economist with MB Associados, a consultancy in Sao Paulo.
--With assistance from Giovanna Serafim.
(Updates with economist quotes starting in fourth paragraph)
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