Brazil: Activity Surprises Again in the First Quarter
Brazil's Q1 2024 economic performance shows a promising 1% GDP growth, driven by a 3.5% year-over-year activity increase. Retail trade grew by 2.5%, reflecting strong internal demand and improved labor market conditions. Industrial production saw a modest 0.3% growth, with manufacturing stagnation offset by construction and mining. Despite tight monetary policy, government measures support growth. However, severe droughts in the south could impact GDP by 0.3 percentage points in 2024.
Figure 1: Brazil Activity Indexes (2021 = 100, Seasonally Adjusted)
Source: BCB and IBGE
As most of the activity indexes that anticipate Q1 GDP are already available, we can have some idea of how the Brazilian economy performed during the first quarter of 2024. Again, we expect the Brazilian economy to surprise positively. The Central Bank Economic Activity Index points to a robust 1% increase in the first quarter. On a year-over-year basis, activity grew by 3.5% according to this index.
The bad news comes from industrial production. Industrial production registered only a marginal growth of 0.3% in the first quarter (q/q). In recent months, manufacturing has shown signs of stagnation, with construction and mining activities being the main drivers of industry growth. On a year-over-year basis, the industrial production index shows a 2% growth. The good news comes from the retail trade index, which has grown by 2.5% in the first quarter of the year, indicating that a large part of the current growth is driven by internal demand. Labor market conditions point to an increase in disposable income, which in turn boosts consumption.
The services index also points to a marginal growth of 0.5% in the first quarter of the year, but the year-over-year comparison indicates this is more related to a recovery from the drop seen in previous quarters, as the year-over-year index currently shows 0% growth.
We currently forecast a 1% GDP growth (q/q) in the first quarter in Brazil, which is again a positive surprise for Brazilian growth. It is possible that the GDP forecasts may underestimate the potential impact of consumption throughout the year. Despite tight monetary policy, government measures such as increasing the minimum wage are having a positive impact on GDP. One possible limiting factor is the impact of severe droughts in the south of the country, which could generate a 0.3 percentage point impact on growth in 2024.