Brazil’s economy expanded less than expected in the third quarter, strengthening the perception that prolonged painful monetary policy is helping to cool off activity, setting the way for easing, probably early next year.
According to official figures, Brazil’s GDP grew by only 0.1% from July to September compared to the previous three months, falling short of the 0.2% increase predicted by a Reuters survey.
The number represents a distinct slowdown from the upwardly revised 0.3% gain in Q2 and an even more pronounced slip from the 1.5% jump in Q1.
Investors are paying closer attention to any indication that the bank will start cutting interest rates, after the central bank left key interest rates tied for the highest in almost two decades.
Markets look to the Central Bank for next steps
The worst results are fueling speculation that rate cuts may come early in the new year. With regulators set to convene next week for their final decision of the year, market participants expect another hold at 15%.
The focus has shifted to the language surrounding the decision, as investors seek hints as to whether easing will begin in January or be delayed until March.
Economists contend that third-quarter figures provide more evidence of an economy steadily cooling but not shrinking.
Polo Capital economist Arnaldo Lima said the IMF’s reading reinforces a soft landing scenario characterised by weak service performance and low household consumption.
He stated that the data support his expectation for a rate drop in January.
Nonetheless, authorities argue that the economy has remained resilient despite extended monetary tightening, citing sticky services inflation and a tight labour market.
The conflict between decreasing activity and ongoing price pressures highlights the delicate balance that the central bank must strike as it considers the timing of its next measures.
Year-on-year growth hits three-year low
On an annual basis, Brazil’s GDP grew 1.8% in the third quarter, slightly above the 1.7% projected in the Reuters poll.
But the pace nevertheless represents a three-year low, underscoring how rapidly the economy has cooled since the robust expansion early in the year.
Liam Peach, senior emerging markets economist at Capital Economics, said that while caution remains warranted, the latest data point to an easing cycle that appears “just around the corner,” echoing expectations for a January cut.
Services stall while industry and agriculture provide support
Brazil’s largest economic sector, services, grew just 0.1% in the second quarter on top of first-quarter figures, according to the statistics agency IBGE, pointing to the subdued role of the sector in boosting growth.
While industry grew by 0.8%, the growth was primarily in extractive industries rather than the overall industrial sector.
Livestock, as well as other crops such as corn, oranges, cotton, and wheat, are helping in the area of agriculture, which expanded 0.4%.
The impact from the second quarter was negative; however, as the bulk of soybean production occurs earlier in the year, other parts of the farm sector helped to make up for this fall.
While soybeans, Brazil’s biggest agricultural export, exerted a smaller impact, higher yields in some crops enabled a more toned-down performance across agriculture in the quarter.
Consumer spending slows, government outlays rise
The proof of flashing cooling on the demand side was clearer. Household consumption is up only 0.1%, the lowest result in a year, in part reflecting still-high borrowing costs and softer services activity.
However, government spending rose a seasonally adjusted 1.3%, which provided some lift to total demand.
Gross fixed capital formation, an indicator of investment, rose 0.9% despite high financing costs, indicating that capital expenditure has not yet fully given in to the pressure of tighter monetary conditions.
The third-quarter figures underpin views that interest rates can possibly start to decline after such a prolonged period of central bank stranglehold, as markets focus on the imminent meeting of the monetary authorities.
The decision on whether to begin easing in January or sometime later in the first quarter should rely on policymakers balancing the growing, clear signals that activity is slowing, with their fear that inflation pressures may remain stubbornly high, especially in services.
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