The reasons behind the boost in Brazil’s short-term economic prospects

Last week, Brazil’s Economy Ministry maintained its GDP forecast for this year at 1.5 percent. While this number seemed unrealistically optimistic a few months ago, it is now more closely aligned with market projections, as several financial institutions have recently revised their 2022 growth forecast upwards.

These include Goldman Sachs (0.6 to 1.25 percent), Bradesco (1 to 1.5 percent), Barclays (0.3 to 1 percent), Banco Inter (0.8 to 1 .2 percent), Bank of America (0.5 to 1.5 percent), and Citi (0.1 to 0.7 percent).

“This dynamic reminds us of what happened in the same period last year: estimates for Q1 GDP increased substantially just weeks before the publication of official results and the outlook for annual economic growth was shifted up,” says Rodolfo Margato, an economist at XP, in a recent report in which the brokerage firm doubled its GDP growth projections to 1.6 percent.

This increased confidence in Brazil’s short-term economic performance comes despite rampant inflation and ever higher interest rates. So what is behind these upward revisions to this year’s growth forecasts?

The more promising scenario is primarily due to the good performance of the services and retail sectors. Official GDP data will not be released until the first days of June, but the GDP monitor of think-tank Fundação Getúlio Vargas, disclosed last week, shows that these two sectors’ strong results drove a 1.5 percent boost in economic activity in the first quarter of the year compared with Q4 2021, the highest bump since the end of 2020.

Retail and services ended Q1 2022 with quarterly gains of 1.9 and 1.8 percent, respectively, well above market expectations. And it...