Brazil’s economy outperforms in Q2 as industry, services defy flood impact By Reuters

By Marcela Ayres

BRASILIA (Reuters) -Brazil’s economy surprised to the upside in the second quarter as the strength of its services and industry sectors offset the impacts of deadly floods in a southern state, bolstering expectations for a solid full-year performance.

Gross domestic product (GDP) expanded 1.4% in the three months through June 30 on a sequential basis, accelerating from the revised 1.0% growth recorded in the first quarter, statistics agency IBGE said on Tuesday.

The quarter-on-quarter performance was above the 0.9% increase expected in a Reuters poll of economists. Year-on-year growth reached 3.3%, surpassing the 2.7% increase projected in the poll.

The stronger-than-expected data increased bets on interest rate futures for a 50 basis-point hike at the central bank’s next policy meeting on September 17-18, with a 40% probability, compared to a 60% chance of a 25 basis-point increase.

Previously, there was a stronger consensus for a 25 basis-point hike, especially after central bank chief Roberto Campos Neto said that the bank remained data-dependent and that any rate adjustment, if needed, would be gradual.

„Overall data suggest a resilient economy, and the exchange rate hasn’t recovered. In other words, two key conditions for a rate hike are met,” said Jose Francisco Goncalves, chief economist at Banco Fator, who expects a 25 basis-point increase.

The central bank’s benchmark interest rate has stood at 10.50% since June.

On the supply side, the main contribution for the Brazilian economy in the second quarter came from the industrial sector, which expanded 1.8% from the previous three-month period.

The services sector, the driving force behind Latin America’s largest economy, also contributed with a 1.0% increase from the first quarter. The farm sector, on the other hand, decreased 2.3%.

On the demand side, fixed business investment increased by 2.1%, while household consumption – buoyed by a strong labor market – rose 1.3%, the same growth rate recorded by government spending.

„The pace of growth is expected to remain strong, still driven by momentum from a heated labor market and better credit conditions for households and businesses compared to the previous year,” the Finance Ministry said in a statement, adding it will revise its GDP projection upwards on September 17.

Speaking to reporters, Finance Minister Fernando Haddad said the annual expansion could surpass 2.7% or 2.8%. In July, the government had kept its GDP growth forecast unchanged at 2.5% for the year.

In May, floods that devastated Rio Grande do Sul state, killing more than 180 people and displacing hundreds of thousands, prompted a series of federal government aid measures totaling more than 27 billion reais ($4.8 billion).

Many economists believe this assistance mitigated the expected losses from the disaster.

($1 = 5.6146 reais)