By Marcela Ayres

BRASILIA (Reuters) -Brazil’s economy rebounded in the first quarter from a sluggish second half of 2023 on stronger private investments and household demand amid a robust labor market, official figures showed on Tuesday.

While the data supports a more optimistic outlook for Latin America’s largest economy than earlier this year, concerns remain about the impact of historic flooding in southern Brazil, which has left a trail of destruction and pushed up food prices.

Brazil’s gross domestic product (GDP) expanded by 0.8% in the three months through March, gaining momentum from a revised 0.1% contraction in the prior quarter, according to the government statistics agency IBGE.

Economic growth from the prior quarter was in line with the 0.8% median forecast in a Reuters poll of economists, while the 2.5% year-on-year rise exceeded the expected 2.2% growth.

The stronger momentum has been fueled by a strong labor market, which spurred household consumption 1.5% higher from the previous quarter, while government spending remained flat.

Fixed business investment also showed a recovery, rising 4.1% amid a monetary easing cycle that has cut the benchmark interest rate by 325 basis points since August last year.

On the supply side, the services sector activity rose by 1.4% compared to the previous quarter. Agricultural output surprised positively with a rise of 11.3% after a steep contraction in the second half of 2023. Industrial output decreased by 0.1%.

Juliana Trece, an economist at FGV Ibre, said the result was positive as robust GDP growth was more broadly spread across sectors when compared to the concentration in the agricultural sector at the beginning of 2023.

However, Trece warned that the tragedy in Rio Grande do Sul, where recent storms and floods killed more than 170 people and left nearly 580,000 displaced, “can and will impact the economy this year.”

William Jackson, chief emerging markets economist at Capital Economics, said he doubts “these kinds of growth rates will be sustained,” as leading indicators point to a weaker second quarter. The manufacturing PMI dropped sharply in May and a key consumer confidence indicator has declined in recent months, Jackson noted.

The Finance Ministry’s economic policy secretariat (SPE) acknowledged that growth is expected to slow in the second quarter, reflecting the calamity in Rio Grande do Sul.

“Even with the positive result similar to that projected by SPE in the first quarter, uncertainties remain regarding the growth estimate for 2024,” it said.

President Luiz Inacio Lula da Silva’s government recently raised its GDP growth projection to 2.5% this year, while private economists forecast a 2.05% expansion in the central bank’s weekly survey.

Lula wrote in a social media post that the GDP outcome shows the government is heading in the right direction.

Both projections indicate a slowdown from the 2.9% growth in 2023, when a record agricultural performance boosted the economy.