The Strength of Internal Demand and the Respective Risks

BRAZIL ECONOMICS - Forecast 25 Mar 2024 by Alexandre Schwartsman, Cristina Pinotti, Paula Magalhães and Diego Brandao

We have revised our growth projection for the year upward to 1.8%. Given the low carry-over from last year, this annual figure requires quarter-on-quarter marginal growth greater than the sustainable pace of output expansion, implying an additional decline of unemployment, and thus persistence of pressures for higher wages.
These pressures appear to explain both the recent elevation of the inflation of underlying services and the stability – at a level higher than the inflation target – of the core metrics, a phenomenon mentioned by the COPOM in its Statement after this month’s meeting.

The change in the Central Bank’s stance, expressing the end of its commitment to maintain the monetary easing pace of 50 basis points per meeting after May, is likely the result of this perception of stronger activity and greater resistance of underlying inflation.

In 2024, the growth of 1.8% will be led by internal demand. Last year’s record harvests of farm commodities, especially soybeans, responsible for expansion of 15.1% in the Agricultural sector, will not be repeated this year according to the projection for a 3.6% grain production decline by the IBGE. The fiscal impulse in 2024 will be lower, despite the effects of payment of a large volume of judicial credit warrants (precatórios) in last year’s final days. On the other hand, a resilient labor market, with strong wage growth helping households to reduce their indebtedness, will sustain growth of consumption this year, albeit less intensely than in 2023. Gross fixed capital formation, which already increased in the last quarter of 2023 even with the high interest rates, will expand this year, although this will not be enough to change the investment rate in relation to GDP.

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