Analysis: Good GDP at the beginning of the year has symptoms of a virus that threatens GDP at the end of 2022 and 2023

GDP grew more than expected at the end of last year or even a couple of months ago. Overall, the figures for the economy’s performance in the first quarter did not contain any news about what has been happening in the country after the epidemic, but they are a little discouraging for the months ahead.

The most relevant number, for those who want to look a little further ahead, was the drop in investment (in new production facilities, homes, machinery, equipment, software, etc.). When this fall is added to the prospects for private consumption from now on, it seems that economists’ forecasts for the second half of the year should be confirmed. That is, the economy growing less, perhaps shrinking, to close the year with a GDP growth of more than 1.5%. It’s more or less the pace of the country from 2017 to 2019, between the Great Recession and the epidemic, less than mediocre.

If growth in the next three quarters is zero, the economy, GDP, will still have grown 1.47% over the 2021 average.

Even when GDP is measured from the perspective of expenses (what was spent), the main highlight was the rise in exports (sales of goods and services abroad) and the fall in imports. That is, domestic demand (the country’s residents’ spending on consumption or investment) was weak—in fact, it fell in the first quarter. The investment number indicates that companies are going to the wall (because of high interest rates, mediocre prospects, the world growing less, political uncertainty, administrative and legal turmoil). Or also because of difficulties in importing, given the disorder in world production of inputs, due to epidemics and war.

When it comes to GDP on the production side, the most notable, but expected, is the continued rise in the service sector. It is the effect of reopening or rebuilding the sector that was most devastated by the restrictions caused by Covid. It may also be that the irrigation of income from exports (expensive commodities) and the advance of electronic commerce have given extra help (especially in transport). The country has never consumed so much diesel in the last 20 years.

The sector of services that grew the most and that contributed the most to the general increase in GDP in the quarter, however, was “other services”: hotels, restaurants and similar services, professional services, private education and health, arts, sports and entertainment, maintenance , domestic services etc. The recovery of employment so far, this year, relevant, must also have contributed, in addition to government measures (FGTS, salary increases in the states).

If “household consumption” (private consumption expenditure) will really pick up from the third quarter onwards and investment will continue to be sluggish or falling, it is difficult to see how the even good pace of this first half of the year can be maintained.

The rise in interest rates will weigh more on consumption and construction. Inflation will remain above 10% a year until September at least. Perhaps the IPCA will close the year at 8%. Famine helps to reduce wages, the lowest in the decade, on average and in real terms. The rents transferred by the government (Auxílio Brasil) will have less effect, eaten up by inflation. Some transitory increases in disposable income will lose effect (withdrawal from FGTS, 13th from INSS in advance). It might be that the tax cut makes you itch. The world economy must grow less.

Disasters and positive surprises aside, this is the picture. There are unknowns, things that GDP and most indicators don’t count. Is there something more to this service recovery? That is, would the reconstructed sector be more efficient or innovative? Have a few years of liberal reforms brought about some substantive, as yet unseen, change? Was there really investment in automation, as anecdotal evidence says? These are speculative guesses only.

On the other hand, so far, although better than expected until the beginning of this year, economic growth seems to be chronically stuck at that pace of 1.5% a year, when it doesn’t take a hit from interest rates, as it is now. The outlook for 2023 is for stagnation, zero growth (ie, GDP per capita decline).