Analysis: Brazilian economy in 2 times

The release of GDP for the first quarter of the year confirmed a positive result at the margin of 1%, slightly above the IBRE Macro Bulletin forecast of 0.9%.

We have always considered that there would be no recession in the Brazilian economy this year and the first quarter would be positive, but even so, the results released in recent months were above expectations, in particular, the data for the month of March. Undoubtedly, the normalization process of the sectors most affected by the pandemic has been faster than expected.

Among the sectors, the highlights were the growth of the activities of Other Services and Transport of 2.1% and 2.2% in relation to the fourth quarter, respectively. As a result, the Other Services activity, which was still below the pre-pandemic level (fourth quarter of 2019), is already 0.8% above this level in the first quarter. And these sectors are labor intensive, so the expressive recovery of employment in the period is also not surprising.

Consequently, the highlight on the demand side was household consumption. According to FGV IBRE’s GDP Monitor, around 50% of the consumption basket consists of services. And even with very depressed real wages, the behavior of the real mass of labor income has been more positive. And the expansion of the Auxílio Brasil program also contributed to the result.

Furthermore, as expected, the external contribution to growth was very expressive, with strong expansion in exports and contraction in imports. And in this regard, it is important to mention that agribusiness has already reached 27.4% of GDP in 2021, the highest share since 2004, according to Cepea (Center for Advanced Studies in Applied Economics – Esalq/USP). Adding to the increase in the extractive industry’s share of GDP, we can say that around a third of GDP depends directly and indirectly on commodities.

As we are experiencing a very favorable environment for commodity prices, the countries that produce these goods benefit. In fact, in several Latin American countries, activity data are also better than expected by the market, with upward revisions of growth.

The rise in commodity prices, the reopening of the economy and fiscal stimulus contributed positively to GDP growth in the quarter. But the most important question at the moment is knowing how long we will be positively surprised. My assessment is that this phase will soon run out, for several reasons.

First, part of the growth was explained by temporary factors, such as the reopening, the normalization of government consumption and the significant external contribution.

On the external side, the expected deceleration for the world economy is significant, as the main reason is the need to reduce inflation. Something that draws attention is the rise in prices of inputs and industrial goods, which due to the reorganization of global production chains, can be much more persistent.

In this context, the cost of deflating the Brazilian economy is Herculean.

In addition to external reasons, we have a generalized inflationary process in Brazil. The reopening was very inflationary, the commodity shock for a long time was not offset by the exchange rate appreciation, and we had a shock in electricity prices last year. A generalized inflation of costs, in all sectors. The pressure for transfers continues and the instrument to curb inflation is to repress demand. There is no other way out.

Finally, investment contracted much more than expected in the first quarter. A bad sign.

So it is necessary to look at the second half of our economy, which should become more evident in the second half of 2022 in 2023. The second half may take a little longer to start, but it is already scheduled.