Central Bank raises Brazil's economic growth forecast for 2023 from 1,2% to 2%, but warns of a slowdown

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Reuters - The Central Bank has improved its growth estimate for the Brazilian economy in 2023 to 2.0% from the 1.2% estimated in March, as shown in the Quarterly Inflation Report released on Thursday. However, it assesses that the scenario still indicates a deceleration in economic activity this year.

The Central Bank explained in the report that the revision reflects positive surprises in some industrial and service sector activities in the first quarter, as well as improved prospects for agriculture.

But it warned that "the projection continues to reflect a prospective scenario of economic activity deceleration in 2023 due to the decrease in global growth pace and the cumulative impacts of domestic monetary policy."

The Central Bank pointed out that modest predictions have been maintained for quarterly variations in industry and services throughout the rest of the year, but agriculture is expected to experience a distinct evolution.

"After a strong increase in the first three months of the year, driven by the record soybean harvest, the sector is expected to decline in the following quarters, contributing to the deceleration of GDP, both through its direct impact and its influence on other sectors," the Central Bank stated in the report.

The Central Bank's estimate is slightly better than the 1.91% growth expected by the Ministry of Finance, while the most recent Focus survey indicates that the market predicts a Gross Domestic Product expansion of 2.18% in 2023.

Economic activity surprised in the beginning of this year with growth higher than expected, reaching 1.9% in the first quarter. This reflected the strongest performance of the agricultural sector in almost three decades, triggering a series of upward revisions by experts and analysts in their economic projections.

The Central Bank's projection for agricultural growth this year increased from 7.0% to 10.0%, while the outlook for industrial expansion was raised from 0.3% to 0.7%. The Central Bank also expects a 1.6% increase in the services sector, compared to the previous estimate of 1.0%.

Regarding inflation, the Central Bank assessed that the recent benign behavior in wholesale prices, both in food and industrial sectors, suggests a continuation of the inflation cooling trend in the coming months.

However, for the second half of 2023, there is an expectation of higher inflation accumulated over 12 months as a consequence of the exclusion from the IPCA calculation of the effects of tax measures that reduced price levels in the third quarter of 2022, as well as the maintenance of the effects of tax measures this year.

Current account - In the Inflation Report, the Central Bank also worsened its estimate for the current account balance this year, now projecting a negative balance of $45 billion, compared to a deficit of $32 billion projected in March.

This is mainly due to a lower surplus expected for the trade balance, which is now forecasted at $54 billion compared to the previous estimate of $62 billion in March.

The monetary authority also revised its credit growth forecast for the country to 7.7% this year, compared to the previous estimate of 7.6%. The new expectation is for a 9.9% increase in household credit in 2023, up from the previous estimate of 8.4%. For businesses, the increase was estimated at 4.4%, down from 6.3% in the last report.

Regarding monetary policy, the Central Bank reiterated the message from the minutes of the Monetary Policy Committee (Copom) that the current conjuncture still requires caution and prudence.

"The Committee considers that the conjuncture demands patience and serenity in the conduct of monetary policy and reminds that the future steps of monetary policy will depend on the evolution of inflation dynamics, especially those components more sensitive to monetary policy and economic activity, inflation expectations, particularly long-term ones, inflation projections, the output gap, and risk balance," the Central Bank repeated.

In its last meeting, the Central Bank kept the benchmark interest rate at 13.75% per year, as expected, and signaled in the minutes of that meeting the possibility of beginning a "cautious" monetary easing in the next meeting in August.

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