Brazil's economy grows faster than expected in QXNUMX

Expansion exceeds analysts' forecasts and raises hopes for a cyclical recovery of the Brazilian economy

Brazil's economy grew 0,6% in the third quarter, beating analysts' expectations and bolstering hopes for a cyclical recovery in Latin America's largest country. The quarterly result, released on Tuesday, is likely to galvanize Brazil's top policymakers, including Economy Minister Paulo Guedes, who is trying to revive growth through a sweeping program of deregulation and privatizations.

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“We are seeing a cyclical recovery,” said Sergio Vale, chief economist at MB Associados. “From now on, we can see a faster recovery. The industry still suffers from international headwinds, but there are some segments that are doing very well, such as agribusiness and real estate. ”

Compared with the same quarter last year, the economy grew 1,2%, above analysts' expectations of 0,9%.

“Growth is still gradual because the Brazilian economy today is still recovering after a very severe recession,” said Luana Miranda, a researcher at the Brazilian Institute of Economics, pointing to a years-long economic crisis between 2014 and 2016.

“In the second quarter, Brazil had not recovered even half of the GDP lost during the recession. We still have a very high unemployment rate, while business and consumer confidence is still very low. But things are happening. Families are consuming, investments are arriving, but everything is slow and gradual. ”

Unemployment in Brazil remains high at 11,6%. Growth for 2019 is now forecast to be around 1%, rising next year to above 2,2%.

Now, the focus is likely to shift to the Brazilian central bank and whether it will cut interest rates to lows next week.

The real, Brazil's currency, fell last week to record lows against the dollar, which analysts attributed in part to falling interest rates. The weakened currency prompted US President Donald Trump to slap tariffs on Brazilian steel on Monday after accusing the South American country of devaluing its currency.

“Given the weak pace of the recovery, the central bank will almost certainly – despite the recent dip in the currency and likely inflation – lower the Selic rate to 4,5%,” said William Jackson, chief emerging markets economist at Capital Economics.

In the longer term, policymakers in Brazil are betting on a series of economic reforms to boost growth. In October, lawmakers approved a pension reform aimed at restoring confidence in the country's fiscal position.

Now, Guedes is shifting focus to overhauling the Byzantine tax system and cutting the bureaucracy that has stifled investment for decades.

“Without a doubt, these reforms will have a positive impact, but their concrete impact will only happen in the long term. These are structural reforms, so they need some time to mature,” said Miranda.

Analysts, however, have warned that Brazil will continue to be hit next year by international headwinds, including a slowdown in the US and the ongoing crisis in neighboring Argentina.

“Our exports are weak for domestic and external reasons – there is a trade war, a slowdown in the economies and a crisis in Argentina,” said Thiago Xavier, an economist at consultancy Tendências.

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