IBC-Br shows resilience of the economy; inflation is a question – 05/19/2023 – Market

One of the indicators of Brazilian economic activity, the IBC-Br, released by the Central Bank this Friday (19), brought a better perspective than expected by analysts. For experts, the result confirms the resilience of the Brazilian economy in the first quarter of this year, but also shows a trend of inflationary pressure on the demand side.

The March IBC-Br showed a decrease of 0.15% in the group of three major sectors of the economy: agriculture, industry and services. But the market expected a greater retreat, of 0.30%, according to the median of economists’ projections. In the first quarter, the index advanced 2.41%.

“The data actually confirm that perspective of a strong first quarter. In general, they showed that the economy remains more resilient than imagined”, says the Director of Research for Latin America at BNP Paribas, Gustavo Arruda.

After the release of the data this Friday, Goldman Sachs analysts said in a report that they expected that economic activity in Brazil will be even more benefited this year by social income transfer programs that are focused on an audience with a high propensity to consume. In addition, the American bank sees the expansion of the wage bill and favorable prospects for agribusiness as drivers of economic growth in the country.

But these factors shed light on the persistent problem of high inflation. “On the price side, this trend of greater dynamism in activity usually brings inflationary pressure on the demand side. Especially in services, one of the main sectors in this recovery”, says economist Matheus Peçanha, from FGV Ibre (Brazilian Institute of Economics of the Foundation Getulio Vargas).

Gustavo Arruda says that it is important to monitor, from now on, not only full inflation indices, but also the cores, which exclude the most volatile items from the price basket analyzed in the surveys. It is for this data that the Central Bank has been looking when making its interest decisions, according to the expert.

“This combination of a stronger economy and the intention of a more expansionist fiscal policy indicates a more persistent core inflation”, says Arruda. Therefore, according to the economist, BNP Paribas does not see room for cutting the basic interest rate, the Selic, this year.

According to Peçanha, the market expects for 2023 a slowdown in food prices, due to the drop in costs and improvement in production, but an acceleration of inflation of services and monitored —items less dependent on the supply and demand relationship.

It is worth mentioning that the credit cycle in Brazil may still generate headwinds for economic activity in Brazil throughout the year, according to Goldman Sachs. The bank says that the high level of interest rates, tight financial conditions, high debt levels, moderation in job creation, weak consumer and business confidence and the incipient economic recovery may still affect Brazilian growth in 2023 .