Weak economic outlook clouds Bolsonaro’s election prospects in Brazil

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The Brazilian economy expanded sharply in the first quarter of the year as retail sales and services picked up following the end of pandemic restrictions.

Official data released on Thursday showed gross domestic product expanded 1 per cent in the first quarter from the previous quarter, when it grew 0.7 per cent. Compared with the same quarter last year, the economy expanded 1.7 per cent.

Economists warned, however, that the rally was unlikely to continue as a combination of soaring inflation and rising interest rates choke off consumption in Latin America’s largest economy. Brokerage XP has forecast a technical recession by the end of the year following two consecutive contractions in the third and fourth quarters.

The outlook will be a blow to President Jair Bolsonaro, who is facing a tough re-election battle in October, with the economy ranked as the primary concern for voters. The far-right leader is at present trailing former president Luiz Inácio Lula da Silva by almost 15 percentage points in polls.

“The strong performance of the economy in the first quarter was a surprise considering the slow pace of growth observed since the second half of 2021. But what we observed was a significant growth of the service sector, following the end of restrictions, combined with strong pent-up demand,” said Rafaela Vitoria, chief economist at Banco Inter.

“But we keep a cautious view especially for the second half of the year, considering the still high inflation and the lagging effect of the significant interest rate increase in Brazil and also the expectation of a slowdown in the global economy following tighter financial conditions abroad,” she added.

The finance ministry forecasts that annual growth will this year reach 1.5 per cent, higher than economists’ estimates of 0.7 per cent.

Since Bolsonaro’s inauguration in January 2019, the Brazilian economy has grown less than 2 per cent, buffeted by persistently high unemployment, shrinking incomes and the impact of the Covid-19 pandemic.

In the past year, inflation has also surged to more than 12 per cent, with rising food and fuel prices frustrating voters ahead of the polls in October. Brazil has the fourth-highest level of inflation among G20 nations, after Turkey, Argentina and Russia.

This has forced the central bank into a series of rapid interest rate increases. Economists expect the benchmark Selic rate to reach 13.25 per cent by the end of the year, up from 2 per cent as recently as March 2021.

“The economy was stronger than expected at the beginning of 2022. Part of the resilient growth momentum, particularly in February and March, will carry over to the second quarter,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs.

“But the second half of the year is expected to be difficult given, among other things, very tight domestic financial conditions, double-digit inflation, record high level of household indebtedness, and the noise and uncertainty generated by a polarising election in October,” Ramos added.

Additional reporting by Carolina Ingizza



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