Brazil dodges recession

Brazil‘s economy rebounded strongly in the second quarter after having shrunk in the first, official figures showed on Thursday, indicating that Latin America‘s largest economy comfortably avoided falling back into recession.

The 0.4 percent growth in the April-June period will be a relief to President Jair Bolsonaro‘s government, which was in large part elected to revive an economy that was struggling to fully emerge from the devastating 2015-16 recession.

But economists were not convinced that the factors behind the surprisingly strong performance in the second quarter – solid growth in fixed investment, construction and industrial production – will be repeated over the remainder of 2019.

Assuming growth remains steady at the second-quarter level for the remainder of the year, gross domestic product (GDP) should grow by 0.6 percent this year compared to last year,according to estimates from the economy ministry in a presentation released on Thursday.

That would be significantly below the 1.1 percent pace recorded in each of the last two years, although official government and central bank estimates are still forecasting a 0.8 percent annual expansion.

“The surprisingly strong rise in Brazilian GDP in Q2 (the second quarter) confirms that the extremely weak activity recorded earlier this year was a blip rather than the start of a renewed downturn,” said William Jackson, Latin America economist at Capital Economics.

“But the economy is still soft and Copom (the monetary policy committee of Brazil’s central bank) is still likely to cut interest rates by a further 50 basis points when it meets next month,” he said, referring to the central bank’s rate-setting committee.

Brazil’s economy expanded by a seasonally adjusted 0.4 percent in the second quarter, the Brazilian Institute of Geography and Statistics (IBGE) said on Thursday. That is twice the median estimate of 0.2 percent found in a Reuters poll of economists.

A 3.2 percent jump in fixed investment and a 0.7 percent rise in industrial production helped drive the expansion, while the services sector grew by 0.3 percent, IBGE said. Agricultural output shrank by 0.4 percent, however.

According to Jackson, that was the third-best quarterly growth rate in fixed investment this decade.

Compared to the same period a year ago, Brazil’s economy grew by 1.0 percent, faster than the 0.7 percent forecast in a Reuters poll of economists. The economy was also 1.0 percent larger on a 12-month accumulated basis.

Within industrial production, which until now had been one of the weakest parts of the economy, manufacturing activity grew by 2.0 percent on the quarter and construction rose 1.9 percent, IBGE said.

Some economists had feared Brazil would tip back into recession, after the economy shrank by 0.2 percent in the January-March period, the first contraction since 2016. But a corner may have been turned.

“We expect real GDP to grow a modest below-trend 1.0 percent in 2019,” said Alberto Ramos, head of Latin America research at Goldman Sachs.