Brazil’s economy likely expanded by 0.4% in the third quarter, according to a Reuters survey of economists, consolidating a steady, if unspectacular, pace of growth ahead of an anticipated upswing into the year end.

Falling inflation and low interest rates in the July-September period helped support consumer spending and industrial output recovered too, but not enough to trigger a faster rate of growth on either a quarterly or annual basis, economists say.

That should come in the fourth quarter, when the effects of record-low interest rates and the boost to investor and business sentiment from Congress passing a landmark pension reform bill in October are likely to be felt more.

The median estimate from 19 economists for the July-September quarter is for a 0.4% rate of expansion compared with the second three months of the year, unchanged from Q2. Their estimates ranged from 0.2% to 1.0% growth.

The median estimate from 18 economists for year-on-year growth was 1.0%, also the same as the year-ago quarter, with a range of between 0.8% and 2.5%.

“We expect another gradual GDP expansion,” economists at Citi wrote in a note to clients, noting that domestic demand and investment should continue to support growth. “At this point, we maintain our 0.7% and 1.8% growth forecasts for 2019 and 2020, but see risks of upgrading our estimate for this year, conditioned on the 3Q GDP release,” they added.

The government last week raised its 2020 growth forecast to 2.3% from 2.2%, and many private-sector economists also see the economy accelerating into next year.

Since the middle of this year, the central bank has slashed its benchmark Selic rate by 150 basis points to a new all-time low of 5.00%, and indicated clearly it will cut another 50 bps to 4.50% later in December.

Coupled with inflation at just 2.54%, well below the central bank’s target for this year of 4.25%, consumers are more willing to borrow and spend, and are seeing real incomes grow. But only gradually.

On the external side, however, Brazil’s trade surplus has been steadily deteriorating this year, as exports to Argentina have collapsed and continued uncertainty surrounding the US-China trade wars has sapped global demand for Brazilian goods.

Brazil’s July-September trade surplus was just under $8 billion, the smallest quarterly surplus since the first quarter of 2016. All else being equal, this will trim GDP growth at the margins.

Brazil’s public finances improved in October, Treasury figures showed, as a seasonally expected monthly surplus helped reduce the government’s overall deficit this year and keep it on track to come in below target.

Still, the 8.7 billion reais ($2.05 billion) primary budget surplus in October was less than economists had expected and social security spending continued to rise, highlighting the underlying strains on the public accounts.

The central government’s primary budget surplus in October was less than the 10.7 billion reais surplus median forecast in a Reuters poll, and 11.0% smaller than the 9.5 billion reais surplus posted in the same month last year.

October tends to be a surplus month, thanks to the inflow of oil-related funds and corporate and income tax intakes.

The year-to-date primary deficit, before interest payments are taken into account, narrowed to 63.85 billion reais, 14.8% less in real terms compared with the first ten months of last year, Treasury said. In the 12 months to October the primary deficit stood at 113.1 billion reais, or 1.1% of gross domestic product, down from 1.3% of GDP a year ago. The government’s 2019 target is for a deficit of 139 billion reais.

But social security spending rose 8.0% on the same month a year ago to 14.6 billion reais. That swelled the accumulated social security deficit so far this year to 179.9 billion reais, some 3% wider than a year ago, Treasury figures showed.

Brazilian equities are expected to shine amid a fog of political and economic uncertainty in Latin America next year, outperforming regional peers due to record-low interest rates and a pending lineup of market-friendly economic reforms.

The latest Reuters quarterly poll shows Brazil’s benchmark Bovespa stock index extending this year’s rally to end 2020 at 130,000 points, according to the median of 18 forecasts from traders, brokers and economists.

That is unchanged from the August survey, but higher than 125,000 predicted in May, when a radical overhaul of Brazil’s costly social security system still hung in the balance.

Reuters