Brazil's economic recovery gains strength

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Friday, September 1, 2017

The Brazilian economy expanded for the second consecutive quarter in 2Q17 and confirmed it has turned the corner after the deep recession in the past two years.

Latin America's largest economy grew 0.2% in the second quarter versus the first quarter, according to the country's statistics bureau (IBGE). Year-on-year, GDP expanded 0.3%.

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The expansion was fueled by the service sector, which advanced 0.6% quarter-on-quarter. Investment as measured by gross fixed capital formation continued to be a drag on the economy with a contraction of 0.7%, showing companies are still hesitant about undertaking large-scale investments.

The "big picture" of the second quarter figures is that the recent political crisis did not derail the economic recovery, said Capital Economics in a research note.

After the release of the Q2 figures, Banco ABC Brasil increased its full-year GDP growth forecast to 0.5% from 0.3% previously, while leaving the 2018 forecast unchanged at 2%.

The economy contracted 3.8% in 2015 and 3.6% in 2016.

"My estimate took into account the current political scenario. Any sign of a political turbulence can force me to reduce my forecast," Luiz Octávio de Souza Leal, chief economist at Banco ABC, told BNamericas.

Leal said the economy is now benefitting from lower inflation, which increases the purchasing power of consumers.

Since October 2016, the central bank has cut the Selic base interest rate by a total of 500 basis to the current level of 9.25%. With annual inflation comfortably below the central bank's 4.5% target, further rate cuts are expected in the coming months.

Given the lagging effect of interest rate cuts, the positive impact from a looser monetary policy is set to show during the second half of this year, said Leal.