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STEADY GROWTH AHEAD
Construction spending in Brazil will increase at a 2.4% compound annual growth rate between 2023 and 2028 with growth led by the nonresidential structures segment, reports Scott Hazelton
Based on sentiment and high-frequency indicators, Brazil’s economic outlook for the second half of 2024 appears positive. The Purchasing Managers’ Index (PMI) and the monthly index of economic activity indicate a relatively strong expansion in the second and third quarters.
However, there are potential risks of fiscal mismanagement that could hinder the ongoing recovery. From a demand perspective, private consumption and fixed investment were the major drivers of growth. Robust growth in investment was from purchases of machinery and equipment, as construction declined in the first three months of the year.
Recent data reveals that the S&P Global PMI Brazil Services Business Activity Index has sustained its expansion for the tenth consecutive month. The index, which tracks monthly variations in business activity volumes, rose from 54.8 in June to 56.4 in July. This uptick signifies the most rapid growth rate observed since June 2022.
The S&P Global Brazil Manufacturing PMI rose from 52.5 in June to 54.0 in July, indicating the most significant enhancement in the sector’s performance since April.
In August 2023, the Central Bank of Brazil started cutting its policy rate to 13.25% from 13.75%. This move has been followed by similar cuts in subsequent meetings. Lower inflation is allowing the monetary authority to move to a less restrictive monetary stance. We expect rate cuts through mid-2025.
Structural reforms approved
The approval of reforms in Congress is a good signal of confidence. The medium-term forecast is enhanced by our assessment that structural reforms approved and implemented in recent years will continue to pay off, among them: Pension and labour reform, the independence of the central bank, a more flexible new fiscal framework and tax reforms.
Source: S&P Global Market Intelligence
The congress of Brazil is among the few in Latin America that is permanently discussing reforms. Having just approved tax reform, it is now embarked on an administrative reform to rationalise fiscal spending. Lack of fiscal prudence, which could derail growth and bring Brazil into recession in 2024, as the benefits of an expansionary fiscal policy would be offset by poor business sentiment and investment, and markets might become extremely volatile. The outlook calls for moderate economic growth in 2024-25. For 2024, monetary policy will be less restrictive but will not move into expansionary mode – still, relatively high interest rates and restricted credit and liquidity will constrain consumption and investment.
Real total construction spending in Brazil declined 0.5% in 2023. Residential construction fell 3.4% while nonresidential construction growth was 0.5%. Going forward, construction spending is anticipated to increase 2.5% in 2024 and 2.2% in 2025.
Residential construction spending in Brazil declined 3.4% in 2023. Activity in this sector is expected to increase 2.7% in 2024 and 2.5% in 2025. Spending will benefit from the government’s My Home My Life programme and nonresidential structures spending will expand 3.7% in 2024 and 3.0% in 2025, led by commercial construction.
Industrial activity will get a boost from investments related to electric vehicles and their components. Infrastructure construction spending is on track to expand 2.0% in 2024 and 1.7% in 2025. Energy infrastructure construction will post the highest growth rate in both years. Investments in solar energy and power plants will lift infrastructure spending.
Construction spending in Brazil will increase at a 2.4% compound annual growth rate between 2023-2028 with growth led by the nonresidential structures segment. In the longer run, growth will remain healthy with a 2.5% compound annual rate between 2028-2033.
The nonresidential structures segment will again demonstrate the highest growth over the period. Infrastructure sees marginal growth.
Offices and data centres
If one takes a longer-term view of investment, Brazil shares a poor office outlook with the rest of the world as the economy works through new work arrangement. Importantly, the office segment included data centers, which are seeing robust activity. The true office sector is even weaker than the data suggests.
The outlook improves for industrial structures, but only to a modest degree. Facilities making transportation equipment will do very well, and utilities and communications will perform above the overall construction growth average. However, refining and chemicals will be in decline. Even facilities making electrical equipment, which are growing in many emerging markets, will see stagnation.
Commercial and institutional structures will do well. In the near term, commercial structures – including retail and hospitality – will outperform history as Brazil’s tourism industry continues to recover from Covid. Institutional is primarily education and health care, which will see somewhat slower growth with tougher fiscal constraints, but Brazil’s needs in these areas remain great.
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Absent new government programmes, infrastructure will settle into its long term run rate. We expect energy investment growth to subside with time as investment in renewable generation becomes mature.
Water and sewer saw outsized growth in recent history, but will revert to the more typical pattern of investment needed to support new construction activity and replacement of older pipes and equipment.