Brazil’s economic activity surprised on the downside with a 2% decline in May

BRASILIA (Reuters) – Brazil’s economic activity fell in May, a central bank index showed on Monday, indicating a non-linear path to the country’s growth, as analysts continued to revise their forecasts upwards for the year.

The IPC-PR economic activity index, a key measure of gross domestic product (GDP), fell a seasonally adjusted 2.0% from April, disappointing analysts who had expected zero growth, according to a Reuters poll.

This marked the biggest monthly decline since March 2021. The observed data series registered an increase of 2.15% on a yearly basis, resulting in a growth rate of 3.43% over the last 12 months.

The disappointing result seen during the 2022-23 summer crop may be due to the disappointing result of the contribution of grain production, said Gabriel Kudo, an economist at Santander Brazil.

Speaking to reporters, Finance Minister Fernando Haddad said the numbers came „as expected” amid an environment marked by persistently high borrowing costs.

„The central bank’s intended recession has come on strong, and we need to be cautious about what could happen,” he said, stressing that current real interest rate levels are putting a heavy burden on the economy.

The central bank has kept its benchmark interest rate steady at a cyclical 13.75% since September to counter inflationary pressures. However, it has recently hinted that a rate cut in August is possible if inflationary conditions continue to improve.

Pantheon Macroeconomics’ chief Latin America economist Andres Abadia wrote in a note to clients that the performance underlines the need for interest rate cuts.

„Many key economic sectors are under pressure on the back of tight financial conditions, but low inflation, a flexible labor market and external conditions that are still supportive of Brazil’s main exports suggest that economic growth will not stop,” he said. said.

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Economists have continued to revise their expectations for the performance of Latin America’s largest economy this year, particularly following a stronger-than-expected first quarter, boosted by a growing agricultural sector.

However, due to seasonal factors, the farm sector is expected to slow down in the second half of the year.

According to the central bank’s weekly survey of private economists, GDP growth for 2023 is estimated at 2.24%, down from 2.9% in 2022, but significantly higher than the 0.8% initially forecast at the start of the year.

Nevertheless, expectations going forward point to a slowdown amid fiscal constraints and higher borrowing costs.

(Reporting by Marcela Ayers; Editing by Jason Neely, Steven Gratton and Andrea Ritchie)

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