Brazil Economic Forecast

Recently released data supports upbeat GDP projections for Q1: Monthly activity stepped on the gas in February, expanding 3.3% on a seasonally adjusted basis (January: -0.1% s.a. mom) and surprising markets with the strongest reading since June 2020. An improvement in the services sector largely drove the upturn. Meanwhile, the manufacturing PMI revealed conditions deteriorated at a slower rate in Q1. Meanwhile, the trade goods balance recorded the largest surplus in the series’ history in March. Moving to Q2, conditions in the services sector strengthened at the steepest pace in nine months in April. Additionally, as inflation receded through April—when it hit a 30-month low—the Central Bank held fire in May, giving consumer budgets some breathing room. However, spillovers from a likely higher unemployment rate could be capping private spending growth in Q2.

Inflation receded to 4.2% in April (March: 4.7%). Our panel expects the downward trend to continue in Q2, but inflation is set to pick up again in H2 2023. Overall, in 2023, inflation will average lower than in 2022 but be well above the Central Bank’s 3.5% target. Upside risks include a weaker-than-expected Brazilian real and premature monetary policy easing.