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Pantheon On Brazil Activity Data: Further Evidence Of Need For Easing

BRAZIL
  • Brazil’s seasonally adjusted economic activity index collapsed by 2.0% M/m in May, well below the consensus prompting the index to rise by just 2.2% Y/y. The sharp drop in May is in stark contrast to mostly relatively decent economic reports in recent weeks, including manufacturing and services spending.
  • For now, Pantheon expect a modest recovery in the June IBC-BR. But if the June index is unchanged, the IBC-BR will rise by only 0.3% Q/q in Q2, slowing sharply from the 2.2% jump in Q1, underscoring the need for interest rate cuts. Several key economic sectors are under pressure, on the back of tighter financial conditions, but low inflation, a resilient labour market, and still-supportive external conditions for Brazil’s key exports, suggest that economic growth will not grind to a halt.
  • The IBC-BR trend remains relatively positive, despite the grim May figures. Low inflation, improving credit conditions—from Q4 onwards—rising industrial and consumer confidence, boosted by increasing expectations of rate cuts, will support economic activity over the next three-to-six months. Patheon expect the COPOM to start easing next month, and to cut rates by a total of 175bp by the year-end, with further action next year.
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