Brazil’s GDP 1.4% rise in Q2 fuels overheating fears, makes rates hike likely – analysts

SAO PAULO (ICIS)–Brazil’s GDP growth in the second quarter stood at 1.4%, surprising on the upside, in what is starting to become an overheating compounded by rising inflation which could lead to hikes in interest rates, according to analysts.

On Tuesday, Brazil’s statistical office IBGE said growth in the second quarter had stood nearly 50% stronger than analysts consensus estimates, which were at 0.9%.

In Q1, already a healthy month due to the peak of the agricultural season, GDP growth stood at 1%.

Year on year, GDP in the second quarter rose by 3.3%, compared with Q2 2024.

GROWTH ACROSS THE BOARD
All subsectors posted growth in the second quarter, said IBGE. In the petrochemicals-intensive industrial sectors, the best performer was electricity and gas, water, sewage, and waste management activities (output up 4.2% quarter on quarter), followed by construction (3.5%) and manufacturing industries (1.8%), which offset a fall of 4.4% in extractive industries.

Within services, all subcomponents posted growth in the second quarter. Spending by households and public institutions both rose by 1.3%, while gross fixed capital formation rose by a healthier 2.1%, quarter on quarter.

Exports rose by 1.4%. but imports rose at a much faster 7.6%, something the chemicals industry is well aware of and thus is demanding hefty import tariff increases to protect domestic producers market share.

OVERHEATING
Even if the economy slowed down considerably in the second half of 2024, which is a pattern for the agricultural-intensive Brazilian economy when the main harvests take place in H1, GDP would be on course to grow by 3% in 2024.

“The flip side is that it will heighten the central bank’s concerns about inflation and the probabilities have probably now tilted towards a 25 basis points hike in the Selic rate at the Copom [monetary policy committee] meeting later this month,” said on Tuesday analysts at London-based Capital Economics.

The Selic main interest rate benchmark stands at 10.50% after three consecutive Copom meetings leaving rates unchanged due to a late uptick in inflation.

Brazil’s annual rate of inflation stood in July at 4.50% and marked its fourth consecutive increase as the Brazilian real depreciated against major currencies and investors showed skepticism Lula’s cabinet is going to keep fiscal discipline going forward.

IBGE is due to publish August inflation figures on 10 September.

“Based on the outturns for the first half of the year, the economy looks set to expand by around 3% over this year as a whole. But this is above Brazil’s potential rate and is going to add fuel to the debate about whether Copom will raise interest rates,” concluded Capital Economics.

“We’ll firm up our forecast after the release of the August inflation figures. But as things stand, we think the balance of probabilities has now tilted towards a modest increase in the Selic rate, beginning at this month’s Copom meeting.”