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Wednesday, June 7, 2023

Weak financial outlook clouds Bolsonaro’s election prospects in Brazil

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The Brazilian financial system expanded sharply within the first quarter of the 12 months as retail gross sales and companies picked up following the tip of pandemic restrictions.

Official knowledge launched on Thursday confirmed gross home product expanded 1 per cent within the first quarter from the earlier quarter, when it grew 0.7 per cent. Compared with the identical quarter final 12 months, the financial system expanded 1.7 per cent.

Economists warned, nevertheless, that the rally was unlikely to proceed as a mixture of hovering inflation and rising rates of interest choke off consumption in Latin America’s largest financial system. Brokerage XP has forecast a technical recession by the tip of the 12 months following two consecutive contractions within the third and fourth quarters.

The outlook can be a blow to President Jair Bolsonaro, who’s dealing with a troublesome re-election battle in October, with the financial system ranked as the first concern for voters. The far-right chief is at current trailing former president Luiz Inácio Lula da Silva by virtually 15 share factors in polls.

“The strong performance of the economy in the first quarter was a surprise considering the slow pace of growth observed since the second half of 2021. But what we observed was a significant growth of the service sector, following the end of restrictions, combined with strong pent-up demand,” mentioned Rafaela Vitoria, chief economist at Banco Inter.

“But we keep a cautious view especially for the second half of the year, considering the still high inflation and the lagging effect of the significant interest rate increase in Brazil and also the expectation of a slowdown in the global economy following tighter financial conditions abroad,” she added.

The finance ministry forecasts that annual development will this 12 months attain 1.5 per cent, greater than economists’ estimates of 0.7 per cent.

Since Bolsonaro’s inauguration in January 2019, the Brazilian financial system has grown lower than 2 per cent, buffeted by persistently excessive unemployment, shrinking incomes and the affect of the Covid-19 pandemic.

In the previous 12 months, inflation has additionally surged to greater than 12 per cent, with rising meals and gas costs irritating voters forward of the polls in October. Brazil has the fourth-highest stage of inflation amongst G20 nations, after Turkey, Argentina and Russia.

This has pressured the central financial institution right into a collection of fast rate of interest will increase. Economists anticipate the benchmark Selic charge to achieve 13.25 per cent by the tip of the 12 months, up from 2 per cent as just lately as March 2021.

“The economy was stronger than expected at the beginning of 2022. Part of the resilient growth momentum, particularly in February and March, will carry over to the second quarter,” mentioned Alberto Ramos, chief economist for Latin America at Goldman Sachs.

“But the second half of the year is expected to be difficult given, among other things, very tight domestic financial conditions, double-digit inflation, record high level of household indebtedness, and the noise and uncertainty generated by a polarising election in October,” Ramos added.

Additional reporting by Carolina Ingizza

Source: www.ft.com

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