Brazil's Macro Watch: Proxy GDP, base rate

Brazil's economy expanded slightly in July, after a tepid performance in the first half of this year.

The central bank's economic activity index, a GDP proxy known as the IBC-Br, expanded 0.57% in July, compared with June. In the second quarter, IBC-Br fell 0.99% compared to 1Q18.

After contracting 3.5% in both 2015 and 2016, the Brazilian economy grew 1% last year.

The finance ministry was initially forecasting growth of 3% for this year but recently revised it down to around 1.5% due to the economy's poor performance in the first half and also following the negative effects of a nationwide truckers' strike in May.

Protesting a hike in diesel prices, the truckers blocked the country's main highways for 10 days in May, leading to a major disruption of essential services, including the supply of fuel and food.

MORE GDP DOWNWARD REVISON

Despite the positive performance of Brazil's economy in July, analysts reviewed downward its estimate for the economy in 2018.

Brazil's GDP is projected to expand 1.36% this year, according to the weekly central bank survey with 100 economists, down from 1.4% projected in the prior week. It marked the fourth reduction of analysts view.

On the other hand, inflation is expected to end this year at 4.09%, according to the survey, up from 4.05% in the previous week.

SELIC LIKELY TO REMAIN STABLE

The central bank is projected to keep its Selic base rate unchanged in its next meeting on Wednesday. Currently, Selic is at 6.5% per year, which is the lowest level ever.

"Given the recent inflation-activity developments we believe the bar for near-term rate hikes is higher than implied in the market. We expect the Copom [central bank rate committee] to keep the Selic rate unchanged at 6.50% through the remainder of 2018, and start the rate normalization cycle in February 2019 driving the Selic to 8.25% by end-2019," said Alberto Ramos, an economist at Goldman Sachs.