Economists expect another positive surprise in Q2 GDP

The impact of the floods in Rio Grande do Sul initially alarmed economists and threatened Brazil’s GDP performance in the second quarter. However, with the local recovery being faster than expected and the national economy remaining robust, analysts now predict that second-quarter GDP growth may even exceed that of the first quarter, which had already been a positive surprise.

A survey conducted by Valor with 80 financial institutions and consultancies shows that the median expectation is a 0.9% increase in GDP for the second quarter compared to the first, when it rose by 0.8%. The range of projections is wide, varying from 0.4% to 1.5%. Compared to the second quarter of 2023, the median of 74 institutions points to a 2.6% increase, up from 2.5% in January-March. The statistics agency IBGE will release the official data on Tuesday.

For 2024, the median estimate for GDP growth is 2.5%, slightly higher than the 2.4% indicated in the latest Focus survey conducted by the Central Bank with market agents.

“This reflects the idea that our economy is showing a level of activity that is not slowing down as expected,” said Felipe Sichel, chief economist at Porto Asset, who projects a 1.1% rise in GDP for the second quarter compared to the first.

“The Central Bank has indeed been cutting interest rates since mid-last year, and this should impact economic activity in some way. But when we consider what the monetary authority and other surveys indicate as the neutral interest rate [one that neither accelerates nor slows the economy] and combine this with inflation expectations, the Selic [policy rate] should remain restrictive. However, looking at the activity data, this restriction is not evident,” he said.

According to Mr. Sichel, this view is supported by other indicators such as the Central Bank’s activity index (IBC-Br), which rose 1.1% in the second quarter compared to the first. At the same time, IBGE surveys showed a 0.7% increase in both industry and services in the second quarter, while expanded retail grew by 0.3%. “All labor market indicators show reasonably robust performance. When you look at the credit data, there is also little reason for concern,” Mr. Sichel added.

According to Alexandre de Ázara, chief economist at UBS BB, the reduction in supply in Rio Grande do Sul due to the May floods may have led to growth in other regions to meet the demand of the population in Rio Grande do Sul. “The rest of Brazil may have grown more than expected. Despite the disaster caused by the floods, there was a surprise in the aggregate GDP growth in the second quarter,” said Mr. Ázara, who projects a 1.3% increase.

On the supply side, the median expectation is that the industry will go from a 0.1% decline in the first quarter to a 0.7% rise in the second.

“Industry did not perform well in the first quarter, nor did it perform much last year. This second quarter shows a slightly better industry, mainly through extractive activities,” said Laiz Carvalho, an economist at BNP Paribas, citing oil as an example.

Construction, Ms. Carvalho added, may also contribute positively to industry, “but not as much as it once did,” she said.

Overall, the second-quarter GDP, from a supply perspective, should mainly be driven by services. The median of the Valor survey indicates growth of 0.8% compared to the previous three months. Although this represents a slowdown compared to the 1.4% increase in the first quarter, economists consider the figure strong.

“Services continue to be a significant driver,” said Ms. Carvalho, who projects a 0.9% rise in GDP for the second quarter compared to the first, and 2.2% for 2024, but noted that the annual estimate has an upward bias and may soon be revised upwards.

More cautiously, 4intelligence expects increases of 0.5% for services in the second quarter, 0.4% for GDP in the same period, and 2.1% for annual activity.

“I think many projections still don’t account for the situation in Rio Grande do Sul. When we look at IBGE’s high-frequency surveys, it seems they didn’t capture the effects of the floods properly. This explains why the IBC-Br ended up being so strong in the quarter, but we know that GDP often paints a different picture due to the broader scope of the data,” said Bruno Lavieri, chief economist at 4i.

According to him, there were issues, for example, with the weighting of IBGE’s monthly surveys for the state. “In the services survey, when toll booths were reopened, they considered a traffic volume passing through at zero price. This caused a significant distortion in the indicator, making it difficult to understand what happened there and the magnitude of the economic impact,” he said.

The assumption of a stronger effect of the floods on activity was spread across sectors in 4i’s projections, but Mr. Lavieri acknowledged that services tend to be the most affected in the short term. “What was not consumed in services at a certain time is not consumed twice the following moment. In industry, to some extent, you can add a second or third shift to recover the production lost in the previous period.”

Among the supply factors, agriculture is expected to post a decline in the second quarter, with a median expectation of a 2% drop, as it typically concentrates most of its production in the first quarter.

For Diego Martins Silva, head of macroeconomic analysis at Petros, who projects a 0.9% rise in GDP for the second quarter compared to the first, the agricultural sector will have little influence on the result. “We estimate a 0.9% growth in GDP excluding agriculture in the second quarter, after a 0.6% rise in the previous period,” he said.

He highlighted the resilience of “cyclical sectors” in the second quarter, symbolized by significant growth in his estimates in the manufacturing industry of 1.8% and Gross Fixed Capital Formation (GFCF, a measure for investments in GDP) of 1.6%, both compared to the first quarter.

GFCF and household consumption are expected to continue driving activity on the demand side, albeit with a slowdown, with median increases of 2.5% and 0.9% in the second quarter, respectively, coming from 4.1% and 1.5% in the first quarter.

“There was more demand than expected in the second quarter, and this should boost the entire year,” said Mr. Ázara, who projects a 2.8% rise in GDP in 2024.

The key highlight on the demand side, economists say, is household consumption. “This is the story we had last year, in the first quarter of this year, and it continues,” said Ms. Carvalho.

“We have an overheated labor market, with the unemployment rate at historic lows. People are more employed and with higher wages. We also have more benefits being paid out, whether through the increase in Bolsa Família cash transfer program or other social benefits. So, disposable income is higher, and household demand is stronger,” Ms. Carvalho said.

Mr. Martins, with Petros, is more cautious about the growth of household consumption in the second quarter. Despite acknowledging the “significant income growth during the period,” he expects a result close to stability—a slight increase of 0.2% compared to the first quarter—due to the already high base of comparison left by the first quarter.

In the case of GFCF, Ms. Carvalho of BNP Paribas highlighted the recovery of investments through credit. “We see recovery, but it’s still at a level below what we usually have,” she noted.

Finally, the external sector is expected to make another negative net contribution to GDP, as the median expectation is for exports to grow by 2% in the second quarter compared to the first, while imports are expected to rise by 7.5%.

Looking ahead, Mr. Ázara, with UBS BB, notes that his strong number for second-quarter GDP does not mean that activity will continue at this pace. He expects GDP to slow down to a 0.4% increase in the third quarter and a contraction in the fourth, amid the impact of the interruption in the interest rate cutting cycle, as the effects of the fiscal stimulus and transfers fade.

“We believe that the strong economic activity is due to delayed effects of fiscal stimuli from earlier in the year, combined with the robustness of the labor market. With the dissipation of the shocks from the first quarter, we expect the growth rate to slow down in the second half, ending the year with a 2.6% GDP growth,” said Ms. Martins.

Mr. Sichel, with Porto Asset, still expects a 0.9% rise in GDP in the third quarter compared to the second and said that the risks are that his 2.5% projection for the year may be slightly higher. “For the fourth quarter, it should start to normalize a bit and show a slightly larger slowdown. But if I had to put a bias on this projection, it would also be for a stronger fourth quarter,” he said.

Source: Valor International 

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