What’s happened?

In July Brazil’s economic activity index (IBC-Br) grew by 0.4% in sequential terms, according to seasonally adjusted data published by the Banco Central do Brasil (BCB, the central bank) and by 3.1% year on year in the 12 months to July. The result in July signals a cooling economy after strong first-half GDP.

Why does it matter?

We expect economic activity to decelerate further over the coming months, as the aggressive 2021-22 monetary policy tightening cycle takes fuller effect and the impact of Brazil’s early 2023 bumper harvest wanes. The IBC-Br index does not provide a sectoral breakdown, but the national statistics agency (IBGE) separately publishes sectoral monthly indicators. These indicators suggest that the services sector was the best-performing segment in July. Improved inflation dynamics and a resilient labour market have supported consumer spending, which in turn buoyed household demand for services in general. The president, Luiz Inácio Lula da Silva, also took measures earlier this year to spur the economy, such as a recent rise in the minimum wage and an increase in the lower threshold for exemption from income tax. The government’s fiscal stimulus has further buoyed demand, particularly among poorer households, explaining the resilience of the services segment.

Meanwhile, sectors that are more responsive to monetary policy, such as industry and retail trade, contracted on a month-on-month basis. Industrial output fell for the second time in a row since June, as manufacturers continue to struggle with high borrowing costs and weaker external demand for their goods. Falling confidence among industrialists in September further emphasises the sector’s waning impetus.

Moreover, a rapid decline in the sales of motor vehicles has caused output in the retail sector to fall. The government recently ended a three-month programme that provided temporary discounts in manufacturing taxes for vehicles, explaining the downturn in car purchases. Meanwhile, sales of materials for desks and computers rose sharply, which prevented a steeper deceleration in retail trade activity. Rather than a sustained growth trend, the strong performance of this sub-category reflects a normalisation from the tepid performance of the past few months, as well as the fact that July’s school holidays in Brazil often lift demand for study materials.

What next?

We expect growth to slow further in the rest of the year and into 2024, under the assumption that a weaker global economy and still-high interest rates will weigh more fully on economic activity. These trends will cause real GDP expansion to soften to 1.6% in 2024.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.