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Brazil’s Q2 starts stronger than expected, but can it keep it up until year end?

Senior Credit Analyst

April IBC-Br index posted strong gains in April

The IBC-Br is the monthly GDP estimate of the Brazilian Central Bank (BCB). Monitoring this index’s performance gives analysts insight into the likely direction of the Brazilian economy, and it also clarifies the BCB’s views so that investors can predict likely interest rate adjustments.

In April 2013, the IBC-Br expanded 0.84% over the month (seasonally adjusted), or 7.3% year-over-year, which was 0.4 percentage points higher than what the market expected. Additionally, the BCB revised its February number upwards to 1.07% from 0.72%.

Good, but not great data

While the April ICB-Br value is certainly surprising, the year-over-year data (which is not seasonally adjusted) is subject to calendar effects. This sensitivity is because in 2013, the Easter holiday fell in March, while it fell in April in 2012, which lowers the base value. Nonetheless, the Easter effect is not as strong as you might expect, since strong supermarket sales offset the weaker industrial production caused by fewer workdays, boosting overall retail sales.

Despite the calendar effects, much of the index’s strength came from a strong automobile sector and building materials sales as reported by the Brazilian Institute of Geography and Statistics (IBGE). The automobile sector seems particularly strong and may continue to boost the indicator. The data from the Association of Auto Manfuacturers (ANFAVEA) showed a jump of 22% year over year for May. This increase is lower than the 33% rise recorded in April, but it’s a very strong value nonetheless.

Volatile indicator, positive trend

The IBC-Br is a quite volatile indicator, so April’s 7.3% year-over-year expansion doesn’t imply that the economy will indeed expand at that rate. In fact, most analysts forecast the end-of-year GDP growth to fall between 2.5% and 3.0%.
Despite its recent fluctuations, the indicator is indeed trending upwards, which shows that the BCB is seeing an overall improvement in conditions. This upswing along with the fact that the inflation growth still has not completely reversed course likely means more fat interest rate hikes in coming months.