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Brazil’s economy is growing less after a disappointing quarter

(Bloomberg) – Brazil’s economy contracted unexpectedly in the second quarter, prompting economists to revise their growth estimates for 2021 as fiscal threats and a water crisis loom on the horizon.

Gross domestic product declined 0.1% from the previous three-month period, compared to a 0.2% growth estimate in a Bloomberg poll. Only three of the 39 economists surveyed expected a negative number. Compared to the previous year, the economy grew by 12.4%, reported the national statistics agency on Wednesday.

As the vaccination campaign advances and more than 60% of the population is partially vaccinated, most businesses have resumed and the prices of services are rising. Still, the informal labor market remains sluggish and consumer confidence will not recover as quickly as expected.

Investment declined 3.6% qoq, while agriculture fell 2.8% and industry fell 0.2%. On the other hand, services increased by 0.7% and family consumption remained stable.

What Bloomberg Economics Says

The Brazilian economy lost momentum in the second quarter despite some remaining political stimulus and significant advances in vaccination. The slight decline illustrates the challenges that will come with the tightening of monetary policy. A water crisis, fiscal uncertainties and political noise increase the risk of growth until next year. We forecast growth of 5.1% for 2021 and 2% for 2022.

– Adriana Dupita, Brazilian economist

According to Alberto Ramos, Latin America chief economist at Goldman Sachs Group Inc.

“This is disappointing print showing that underlying growth in Brazil is still very weak,” he said.

Ramos cut its growth forecast for this year from 5.4% to 4.9%, assuming there are no major energy constraints and a largely controlled pandemic in the future. Haitong Investment Bank also said it is revising its GDP estimates for 2021 and 2022 downwards.

The story goes on

Higher rates, water crisis

Brazil’s aggressive monetary tightening campaign is beginning to affect economic activity. The central bank has already raised the key rate from an all-time low of 2% to 5.25% and should bring it to 7.5% by the end of the year.

Meanwhile, inflation shows no sign of subsiding. It’s running at an annual pace of 9.3%, well above the 3.75% target, and economists continue to revise their forecasts as a severe drought depletes hydropower plants and drives up electricity prices.

Read more: Brazil’s inflation outlook worsens as electricity costs rise

Central bank governor Roberto Campos Neto said the economy’s performance in the second quarter was “more or less” in line with the bank’s expectations, defending the need to raise interest rates further.

The swap rates of the contract due January 2022, which show investors’ expectations for the benchmark rate, fell briefly after the data was released. They later rose along with the rest of the curve, reflecting greater inflation fears.

Plans to expand social programs ahead of next year’s elections have also raised investor concern and expectations of tighter monetary policy.

(New version of the lead, revision of the growth forecast in the seventh paragraph)

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