Loss of economic rhythm consolidates Selic cut – 07/19/2023 – Market

Economic activity slows down in Brazil with the end of the main months of the soybean harvest and the maintenance of high interest rates on the consumption of goods and services. This is the assessment of analysts based on the release of indicators that point to negative results in May.

This Wednesday (19), the GDP Monitor, from FGV (Fundação Getulio Vargas), signaled a 3% drop in economic activity compared to April. Earlier, on Monday (17), the IBC-Br, released by BC (Central Bank), had already indicated a 2% drop on the same basis of comparison.

For analysts interviewed by Sheet, the brake on activity helps to consolidate the scenario for the start of cuts in the basic interest rate (Selic) at the next meeting of the BC’s Copom (Monetary Policy Committee). The meeting is scheduled for the 1st and 2nd of August.

“These weaker economic activity data help justify the Central Bank to start cutting interest rates in August”, says Sergio Vale, chief economist at MB Associados consultancy.

The main doubt, according to him, is whether the reduction will be 0.25 percentage points or 0.5 percentage points. For now, the MB forecasts a drop of 0.25 percentage points. The Selic has been maintained by the BC at 13.75% per annum in recent months.

“I see no reason for the Central Bank not to reduce interest rates in August”, says Alex Agostini, chief economist at the risk rating agency Austin Rating.

“If it takes longer, it will throw economic activity to the ground”, he adds. Austin predicts a drop of 0.5 percentage points in the Selic in August.

The BC has been maintaining the base rate at 13.75% as a way to cool down the demand for goods and services to contain prices and anchor inflation expectations.

The foreseen side effect is the loss of rhythm of the economic activity, since the credit becomes more expensive for the families and the companies. This slowdown worries President Luiz Inácio Lula da Silva (PT), who has been pressuring the BC to reduce the Selic rate.

According to economist Juliana Trece, from FGV Ibre (Brazilian Institute of Economics of the Getulio Vargas Foundation), the 3% drop signaled by the GDP Monitor in May mainly reflects the impact of the end of the soybean harvest, more concentrated in the first quarter .

In addition, according to her, high interest rates have been bringing difficulties to a more robust performance of industry and services.

“The 3% drop is frightening, but it is very much related to the end of the soybean harvest. It is a bad number, obviously, but it seems worse than it really is”, ponders Trece.

She also assesses that the loss of pace of activity may favor the reduction of interest rates in the coming months. “At the beginning of the year, agriculture masked the problems that economic activity had with interest rates. The beginning of the year was not as good as it seemed, and even now it is not as bad as it may seem”, she says.

For now, FGV Ibre’s projection for GDP is a 1.6% increase in 2023. Financial market analysts, however, already see an increase of more than 2%, despite the loss of quarterly pace after the greatest impacts of the harvest.

The GDP Monitor monthly estimates the behavior of economic activity in Brazil. The official GDP calculation is released every three months by the IBGE (Brazilian Institute of Geography and Statistics).

The most recent IBGE result is for the first quarter, when there was growth of 1.9%. The high was above analysts’ projections at the time.

At the time, GDP was boosted by agriculture, which recorded a 21.6% jump from January to March. The sector benefited from improved weather conditions this year, which led to record projections for the harvest.

Sergio Vale, from MB Associados, projects a negative variation of 0.2% for GDP in the second quarter. According to the economist, the estimate is associated with the end of the main effects of the harvest.

“Even so, the economy remains strong, as it rose 1.9% in the first quarter and fell only 0.2% in the second. It is a resilient economy, which should deliver growth close to 2.5% in the accumulated result for the year”, predict. MB’s estimate, for now, is a 2.1% advance for GDP in 2023.

Austin Rating, in turn, raised its projection for the accumulated indicator for this year from 2% to 2.4%. Alex Agostini, chief economist at the institution, says that possible cuts in interest rates and a truce in inflation tend to benefit consumption.

In addition, measures such as the fiscal framework and the Tax Reform also contribute to improving expectations in the economy, according to him.

“The government managed to mitigate most of the risks, which were very high, and even very quickly. All of this should contribute to improving expectations in the second half”, says Agostini.

Economist André Perfeito assesses that the data from the GDP Monitor, as well as those from the IBC-Br, “put pressure” on the Copom for stronger cuts in interest rates. He predicts Selic of 11.75% at the end of the year.