Brazil: Services to Push Growth in Q2
June's released indicators illuminate Brazil's Q2 2023 performance, signalling growth mainly in services, evidenced by a robust 1.7% retail increase and 0.5% services volume expansion. Despite positives, future stagnation looms due to limited sectoral spillovers and external uncertainties. Plausible 2.5% 2023 growth, will likely be led by a 14% Agricultural sector surge.
Figure 1: Brazil Activity Indicators (2019 = 100, Seasonally Adjusted
Source: IBGE and BCB
The majority of monthly activity indicators for the month of June have already been released, shedding light on the performance of the Brazilian economy during the second quarter of 2023. These indicators collectively suggest a growth during the quarter, primarily originating from the services sector. Within this context, the broad retail trade witnessed a robust growth of 1.7% over Q2, likely spurred by the tax incentives for new vehicle acquisitions. Meanwhile, the services volume index experienced a 0.5% expansion during the same period, primarily propelled by substantial advancements in the food and hotel sector (posting a 1.1% growth in the quarter) and the transport group (registering a 0.8% expansion in the quarter). The IT Services sector also made strides, with a growth of 0.5%.
The Industrial production segment is anticipated to have recorded a modest upturn during the quarter. The extractive industry production, notably driven by increased oil production in the Pre-Salt area, observed a growth of 1% in the second quarter. Conversely, the manufacturing sector experienced stagnation, posting a 0% growth. Although an activity index specific to the construction sector is unavailable, it is plausible that this industry also remained stagnant throughout the quarter, likely impacted by elevated interest rates.
While the agricultural sector's robust growth in the first quarter is unlikely to be replicated, we anticipate a more subdued expansion in its volume. This is attributed to the belief that much of the projected harvest growth for 2023 had already been factored into the first quarter's performance, resulting in a marginal increase in the subsequent period. Reflecting the broader economic trajectory, the central bank activity index—an indicator proxying the GDP—demonstrated a 0.5% growth during the quarter.
Despite this favourable growth, indications suggest that the Brazilian economy may encounter a degree of stagnation during the latter half of the year. The significant momentum generated by the Agricultural sector is projected to yield limited spill-over effects to other sectors, and external stimuli are not anticipated, particularly in light of a potential deceleration in the Chinese economy. Domestically, internal demand is expected to be hampered, chiefly due to persistently high interest rates. Despite the initiation of an easing cycle, interest rates are poised to remain restrictive for a considerable duration, with their impact materializing with lags —thereby tempering the pace of growth. Nevertheless, a growth rate surpassing 2.5% for the year 2023 remains highly plausible, largely attributable to a substantial 14% expansion in the Agricultural sector.