Extra Caution, Less Cuts

BRAZIL ECONOMICS - Report 20 May 2024 by Alexandre Schwartsman, Cristina Pinotti, Paula Magalhães and Diego Brandao

The current domestic scenario has been characterized by resilient activity, marked by positive surprises at the beginning of the year, and an increasingly tight labor market. In the Copom minutes, the Committee indicates that in this context, combined with the adverse external environment and unmoored inflation expectations, a more cautious, hence more contractionary, monetary policy is necessary.

Economic growth in 2024, pushed by demand, reflects the effects of monetary easing, the resilient labor market, and fiscal stimulus. These factors should continue to support activity expansion throughout the year, especially through consumption. However, we highlight the risks associated with investment, which, despite the projected expansion for the first quarter, faces an environment of increasing uncertainties regarding economic policy and high long-term interest rates. Additionally, the floods in Rio Grande do Sul are expected to impact GDP, although the size of the impact on activity remains uncertain.

Regarding the labor market, which is increasingly tight, rising wages keep pressuring production costs. Labor income has been growing faster than productivity and is likely to impact prices, particularly in services. This scenario supports the need for greater caution in conducting monetary policy, in line with the message expressed in the Copom minutes.

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