December 3, 2019 / 12:47 PM / 5 days ago

UPDATE 2-Brazil GDP surprise shows economy in better shape than thought

(Adds detail, comment)

By Jamie McGeever

BRASILIA, Dec 3 (Reuters) - Brazil’s economy appears to be on a stronger footing than most observers had believed, official figures showed on Tuesday, with growth in the third quarter beating expectations and previous readings going back to last year being revised higher.

The faster growth so far this year and over the course of 2018 shows that Latin America’s largest economy steered clearer of recession than previously thought, and is accelerating into the year end.

Economists say this is evidence that the government’s economic reform agenda of getting the public finances in order and reducing the size of the state is paying off, although it also raises questions over how low the central bank can cut interest rates.

“The latest figures and revisions are a much-needed boost to the economy, but above all, reflect the effectiveness of the government’s economic program and the central bank’s monetary policy,” said Jason Vieira, chief economist at Infinity Asset Management in Sao Paulo.

Jose Francisco Goncalves, chief economist at Banco Fator in Sao Paulo, agreed: “This is positive for the government’s reform agenda, but not so good if you expected interest rates to be heading below 4.5%.”

The central bank has slashed its benchmark Selic rate by 150 basis points to a new all-time low of 5.00% this year, boosting business and consumer sentiment, and indicated clearly it will cut another 50 bps to 4.50% later in December.

Brazil’s gross domestic product expanded 0.6% in the third quarter over the second quarter, government statistics agency IBGE said on Tuesday, driven by strong growth in agriculture, industry, business investment and domestic demand.

That was faster than the 0.4% forecast in a Reuters poll of economists and the highest since the first quarter of last year.

The second quarter was revised up to 0.5% quarterly growth from 0.4%, and data show that the economy was flat the first quarter, as opposed to the 0.2% contraction initially estimated.

IBGE also revised up last year’s overall economic growth to 1.3% from 1.1%.

The 0.6% quarterly growth in the July-September period took the rate of year-on-year growth up to 1.2%, also stronger than the 1.0% expansion forecast by economists.

Agribusiness grew by 1.3% in the third quarter and industrial production grew by 0.8%, the best performance in almost two years, IBGE figures showed.

Business investment rose 2.0%, another strong performance following 3.0% growth in the previous three months, while the services sector, which accounts for more than 70% of the Brazilian economy, expanded by 0.4%, IBGE said.

On the flip side, government spending contracted for the second quarter in a row, shrinking by 0.4%, while net exports continued to be a drag on growth too, with exports falling 2.8% and imports rising 2.9%. (Reporting by Jamie McGeever; Editing by Alison Williams and Chizu Nomiyama)

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