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Another negative indicator reinforces likelihood of interest rate cuts

Economic growth in Brazil is likely to drop with the end of the soy harvest. Photo: Vinicius R. Souza / Shutterstock.com

Brazil saw negative economic growth in May, according to the GDP monitor of the Brazilian Institute of Economics at the Fundação Getulio Vargas (FGV), a think tank. The FGV’s monthly GDP monitor contracted 3 percent in May, which is set to increase pressure on the Central Bank to cut the country’s high interest rates.

The GDP monitor grew 1.8 percent compared with May 2022 and accumulated growth of 3.5 percent in the three months to May this year.

Family consumption remained resilient albeit expanding at a slower pace than last year, growing 2.9 percent in the three months to May, while investment (gross fixed capital formation) dropped 0.8 percent in this period due to negative results in machinery and equipment.

The negative monthly results of the FGV’s GDP monitor are unsurprising, according to economist André Perfeito, who says “it would be unreasonable to expect continuous growth of economic indicators.”

These numbers echo recently released negative retail figures for May, as well as the Central Bank’s economic activity index (IBC-BR), which earlier this week posted a 2 percent drop in May. These results highlight Brazil’s dependence on the agricultural sector for growth, after strong Q1 results were boosted by agribusiness.

The strong decline in economic output in May is attributed in large part to the end of the main soy harvesting months — but not only. “Although the drop in GDP can largely be explained by the specificities of agriculture and livestock, it must be noted that contractions were also registered in the industry and services sector in May, albeit of a different magnitude than agribusiness (both -0.1 percent),” says Juliana Trece, coordinator of the FGV’s GDP monitor.

High interest rates drove the decline in services and industry, Ms. Trece adds, “which helps explain the economy’s difficulty in growing more robustly and independently of agricultural activity.”

Mr. Perfeito says these latest indicators increase the pressure on the Central Bank to cut interest rates at its next monetary policy meeting in August, as the Luiz Inácio Lula da Silva government is likely to double down “on its strategy of putting the onus [of responsibility] for low growth on the Central Bank.”

The economist forecasts a 0.5-point cut and sees the Selic benchmark rate falling from 13.75 percent currently to 11.75 percent by the end of the year.