Brazil steers clear of recession as second quarter GDP growth accelerates

BRASILIA (Reuters) - Brazil’s economy rebounded strongly in the second quarter after having shrunk in the first, official figures showed on Thursday, indicating Latin America’s largest economy comfortably avoided falling back into recession.

The 0.4% 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.

Gross domestic product (GDP) will grow by 0.6% this year compared to last year, assuming growth remains steady at the second-quarter level for the remainder of the year, according to Economy Ministry estimates in a presentation released on Thursday.

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

“The surprisingly strong rise in Brazilian GDP in Q2 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 American economist at Capital Economics.

“But the economy is still soft and Copom 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 GDP expanded by a seasonally adjusted 0.4% in the second quarter, statistics agency IBGE said on Thursday, twice the median estimate of 0.2% in a Reuters poll of economists.

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

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

Compared to the same period a year ago, Brazil’s GDP grew by 1.0%, faster than the 0.7% forecast in a Reuters poll of economists. The economy was also 1.0% 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% on the quarter and construction rose 1.9%, IBGE said.

Some economists had feared Brazil would tip back into recession, after the economy shrank by 0.2% 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% in 2019,” said Alberto Ramos, head of Latin American research at Goldman Sachs. “Real activity is expected to be supported by a firmer credit impulse, accommodative monetary and financial conditions, and gradual labor market improvement.”

Reporting by Jamie McGeever; Editing by Chizu Nomiyama and Bernadette Baum