Bull market and positive macroeconomic data fuel Brazil optimism

The more than 140 financial institutions surveyed by the Central Bank every week have once again raised their expectations for Brazil’s GDP growth in 2023. The median projection for the year now stands at 1.84 percent, well above last week’s forecast of 1.68 percent. 

A month ago, the median forecast sat at just 1 percent.

Forecast improvements continue to reflect Q1 GDP results that came in well above market expectations. Driven by agribusiness and the resilience of the services sector and household consumption, the Brazilian economy grew at an annual rate of 4 percent between January and March and by 1.9 percent on a quarterly basis. 

Data from May’s trade and services sectors, which will be released later this week, should show whether the Brazilian economy is maintaining a higher-than-expected growth pace in the second quarter.

Also at the end of this week, the May IBC-Br, the Central Bank’s monthly activity index (considered to be a reliable GDP predictor), will be released.

Economists are also more optimistic about the disinflationary process because it pressures the monetary authority to start cutting the Selic, the country’s benchmark interest rate, from its current level of 13.75 percent, in the third quarter. Estimates for this year’s inflation fell for the fourth consecutive week, from 5.69 to 5.42 percent, while the projections for next year dropped for the second time, from 4.12 to 4.04 percent. 

The IPCA, the country’s official inflation index, rose by just 0.23 percent in May, showing that inflation is indeed cooling down. The 12-month rate is at 3.94 percent, closer to the country’s 3.25 percent inflation target for this year. 

Nevertheless, inflation in June may behave differently, with states resuming tax collection on fuels, and health plans increasing prices of individual and family premiums (those paid entirely by consumers) by up to 9.63 percent — a limit defined today by the sector’s regulatory agency. 

These health plans account for about 16 percent of the country’s supplementary health market. Prior to that, corporate premiums, which comprise the bulk of the sector, have already raised prices by as much as 30 percent in recent months.

For 2024, economists are slightly more pessimistic than before, expecting GDP growth of only 1.27 percent — 0.11 points below the projections of a month ago. They see the effects of monetary tightening fading only next year, with investment rates recovering slowly, hence the low GDP forecast for 2024.

Positive macroeconomic data has also jolted Brazil’s stock market. The Ibovespa, Brazil’s main stock index, on Friday closed up more than 20 percent from its March 23 intraday lows, marking the start of a new bull market. The rise stems from a mix between positive economic data and a greater sense that Congress will defend a pro-market agenda even when the government does not.