Brazil’s Economy Grows at Past Levels as Bets on Interest Rates Rise

(Bloomberg) — Brazil’s economic growth grew more than expected in the second quarter, boosted by strong consumer spending, raising expectations of an interest rate hike soon.

Official data released on Tuesday showed that gross domestic product increased by 1.4% in the April-June period compared to the first quarter. The figure beat all estimates in a Bloomberg survey of analysts that had a median estimate of 0.9% – and was far ahead of what economists were predicting at the start of the period.

An increase in household spending, fueled by government transfers, helped deliver strong growth in the first half of the year, handing President Luiz Inacio Lula da Silva a political victory. But it has also raised fears that Latin America’s biggest economies are overheating.

“The problem is that the economy is overheating,” said Alberto Ramos, Goldman Sachs Group Inc.’s chief Latin American economist. “Growth is not healthy because it is being used by fiscal steroids.”

The exchange rate on the contract due in January 2026, an indicator of market sentiment on monetary policy at the end of next year, rose nearly 14 basis points in morning trade after the report showed growth it is strong.

What Bloomberg Economics Says

The release is “a welcome development as the government struggles to meet its uncertain financial targets. From a monetary policy perspective, large GDP figures indicate instability in the economy, which may be growing beyond capacity. That raises the risk of a rise in interest rates, especially if the rate is reduced before the Sept. policy decision. 18.

– Adriana Dupita, Brazilian and Argentinian economist

— Click here to read the full report

Government funding is increasing as the Lula administration tries to improve living conditions for Brazil’s poor. Several measures taken earlier in the year, such as the minimum wage hike in January, continue to boost demand amid tight financial conditions.

Combined with the hottest labor market in nearly a decade, Brazilians have had more money to unload goods and services. Their wallets were also relieved as the central bank lowered borrowing costs during that period, until it hit the brakes on its easing cycle and kept rates at 10.5% in June.

Family Use

Overall, household consumption increased by 1.3% in the second quarter compared to the previous three-month period. Industrial output, another key driver during the period, gained 1.8% while services rose 1%.

The report was the first GDP figure since floods ravaged the rich state of Rio Grande do Sul, one of the traditional centers of Brazil’s strong agricultural sector, which had contracted 2.3% in the quarter. the math department said.

Brazil’s GDP grew by 3.3% from last year. The strong result led Lula to give that information as proof of his economic management.

It is “growth that increases jobs, household consumption and health,” the president wrote on his Threads page. “Without courage or falsehood.”

After the release, the Finance Ministry said it would raise its economic growth forecast for 2024 from the current level of 2.5%.

Exchange

But price pressures are increasing. Traders are already betting that policymakers will raise borrowing costs by at least a quarter when they meet later this month.

Much of the concern of investors stems from the government’s struggle to provide assurances that it can fight poverty without burdening public accounts. The budget deficit has risen to 10% of GDP in the past 12 months, from 6.8% in the previous year.

Lula’s economic group has worked on its 2025 budget as progressive allies push for more spending while financial markets demand more fiscal restrictions. So far, their efforts have done little to ease concerns, causing a sell-off in Brazilian assets in recent months, and the real one is among the most ineffective funds in the market this year.

Although growth appears likely to continue, tensions over monetary policy will worsen in the coming quarters.

The trade-off of “public spending versus fiscal discipline will remain the defining characteristic of the Lula administration,” said Mario Braga, a political analyst at RANE, a consultancy. “The closer we get to the 2026 election, the harder it will be for him to stick to this commitment.”

That appears to put more pressure on the central bank, which is preparing for a succession as Governor Roberto Campos Neto’s term comes to an end this year. Last week, Lula named the bank’s Financial Policy Director Gabriel Galipolo as his replacement, a choice the Senate will have to approve in the coming weeks.

The choice has only saved the markets. Political observers say the new head of the central bank will have to act quickly to prove that the institution will not bow to Lula’s will, otherwise financial pressures will worsen.

The central bank “will have trouble building trust, especially in its new president,” said Sergio Vale, chief economist at MB Associados, a Sao Paulo-based consultancy.

–With the help of Giovanna Serafim.

(Updates with quotes from economists starting in the fourth paragraph)

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