Unexpected growth triggers wave of upward revisions in GDP 2023 forecast, between 2% and 2.5%
06/02/2023
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Marco Caruso — Foto: Divulgação
The strength of agriculture for the country’s economy at the beginning of the year exceeded the most optimistic expectations, maintaining growth above analysts’ projections in the first quarter, and triggering a wave of upward revisions in projections of GDP for 2023. Demand components such as household consumption and investments, on the other hand, tell a story of less momentum, economists point out.
They say that some of the strength in the agricultural sector could possibly spill over into the second quarter, while services may also show greater resilience than expected. This does not change the view that activity will slow down in the coming quarters compared to the beginning of the year, reflecting, among other things, high interest rates.
From January to March, Brazil’s GDP grew by 1.9%, compared to the last three months of 2022, seasonally adjusted, as published Wednesday by the Brazilian statistics agency, IBGE. The result was well above the median expectation of 72 consultants and financial institutions heard by Valor of an increase of 1.3%. It was also the best performance since the 3.4% growth in the fourth quarter of 2020 when activity was recovering from the initial slump of the pandemic. In terms of the first quarter of 2022, the increase was 4%, with a median of 3%.
The 1.9% quarterly increase “was the strongest reading in 15 years, excluding recoveries from the pandemic and the global financial crisis,” Capital Economics said in a report. In a preliminary estimate, Santander economist Felipe Kotinda estimates that the Brazilian economy is currently about 3.2% above its potential.
In the first quarter, GDP reached an all-time high since records began, in 1996, and is 6.4% above the pre-pandemic level – in the fourth quarter of 2022, it was 4.4% above. The manufacturing industry is the only activity, on the supply side, which is not at the highest level since records began.
In addition, there have been revisions in the IBGE series. For example, the decline in GDP for the fourth quarter of 2022 improved to 0.1% from 0.2%.
With the result for the first quarter, the carryover effect for the year’s GDP was 2.4%, which means that if the economy stagnates in the coming quarters, the year will still end with a 2.4% increase in activity. Against this backdrop, economists have raised their forecasts for GDP in 2023 to a range between 2% and 2.6%.
In the first quarter, the behavior of the GDP decoupled itself from the performance of services (0.6%) and household consumption (0.2%), which it typically follows because they are the sectors with the greatest share in the economy on the supply and demand sides, respectively.
GDP growth was linked to the performance of agriculture, which accounts for less than 10% of the economy, but grew 21.6% in the first quarter of 2023 compared to the fourth quarter of 2022, more than double the consensus of analysts, of 10.3%.
This was the largest increase between consecutive quarters for the segment since the 23.4% growth in the fourth quarter of 1996. It was also only the fifth time in the series that agriculture has posted double-digit quarter-over-quarter growth.
The agricultural sector was driven by the growth in agriculture and productivity of crops that have a relevant harvest in the first quarter, especially soybeans, points out a report by LCA Consultores. According to Rebeca Palis, coordinator of National Accounts at the statistics agency IBGE, soybeans accounted for nearly 70% of the crop in the quarter.
Part of this agricultural performance also reflects a reversal of the adverse weather shock that affected the South region in 2022 and caused the sector’s GDP to shrink by 1.7% last year, LCA Investimentos recalls.
Looking at GDP in terms of value added at basic prices (which does not take into account taxes on products net of subsidies), agriculture weighs a little less than 8% of the economy but was responsible for about 1.5 percentage points of the seasonally adjusted 1.9% increase in total GDP, LCA calculates.
These are only the direct effects. Agribusiness, which includes parts of industry and services, currently accounts for almost 25% of Brazil’s GDP, according to an estimate by the Center of Advanced Studies on Applied Economics (Cepea/Esalq) and highlighted by LCA. It is likely, says the consulting firm, that this performance has generated spillovers into other segments, such as transportation, which has also risen 1.2% and contributed to boosting the services sector in the first three months.
The surprising strength of agriculture also helps to explain the increase of 23.7% (R$ 59.8 billion) in stocks in the first quarter of 2022, which contributed positively to the GDP in the period, and the 0.4% decline in exports. “A large part of the harvested crop has not yet been exported and ended up in stocks,” explains Ms. Palis, from IBGE.
Despite the fall in exports, the external sector also made a positive contribution to the GDP from January to March as imports fell much more (7.1%). Domestic absorption – the sum of consumption, investment, and government spending – fell for the first time since the second quarter of 2021, with consumption and investment trending down for the fourth consecutive quarter, noted Cassiana Fernandez and Vinicius Moreira, economists at J.P. Morgan.
The surprising performance of the agribusiness sector is complemented by the resilience of the services sector which grew above the median expectation of 0.3%. Only “other services” – which includes in-person activities such as hotels – and information and communication services, categories that grew strongly after the pandemic shock, saw a decline.
Still, on the supply side, the manufacturing industry contracted by 0.1% in the first quarter of the year compared to the previous three months. For IBGE, the result represents virtual stability, and it was also a little better than the median that Valor found, of a decline of 0.3%.
The emphasis on agriculture may hide the fact that the other sectors suggest caution in the coming months, said David Beker, head of economics and strategy at Bank of America (BofA) in Brazil. He cites the drop in the investment rate, to 17.7% of GDP in the first quarter, and the rise in the savings rate, to 18.1%. “These numbers are turning on an alert sign ahead.”
Capital Economics agrees that the relatively concentrated GDP growth in the first quarter “suggests that the economy is not as strong as the impressive 1.9% increase would suggest.”
According to Ms. Palis, with IBGE, high interest rates and reduced credit supply contributed to the slowdown in the industry, and, on the demand side, gross fixed capital formation (GFCF, a measure of investment in machines, construction, and innovation) in GDP. GFCF fell by 3.4% in the first quarter.
Also on the demand side, household consumption rose 0.2% year-on-year, below the median forecast of 0.7% by Valor. “The agribusiness did very well, industry was not as bad as we expected, and services did very well too,” said Marco Caruso, chief economist at Banco Original. “But when I look at demand, household consumption grew only 0.2%, despite the fact that the real wage bill is growing, while the unemployment rate is falling. Where is the money going?”
He says he is “mathematically forced” to revise upward his forecast for this year’s GDP (to 1.7% from 0.9%) but points out that the weak demand and the volume of investment portrayed suggest that there must be some kind of moderation. “Brazil is experiencing a positive supply shock: there is more production, less inflation, only that the part coming from the rural areas is not permanent.”
Part of the remarkable performance of agriculture could also appear in the second quarter, notes Roberto Secemski, chief economist for Brazil at Barclay. In addition, some economists point out that despite the clear exhaustion of the process of reopening the economy, services can still make a positive contribution to GDP, supported, for example, by still historically low unemployment and some additional fiscal stimuli, such as the adjustment of the minimum wage since May 1.
The contribution of stocks can also decrease, but this is not necessarily negative, Ms. Palis said. “The change in stocks can go to exports, and then it continues to count positively. From the April data, we have already seen that soybean exports have increased well,” she said.
“However, the fading impulse from economic reopening, tight domestic monetary and financial conditions, high levels of household indebtedness, low levels of economic slack (unemployment rate at the NAIRU), moderating job creation, soft consumer and business confidence, and the incipient turnaround in the credit cycle are expected to generate headwinds to activity beyond the first quarter of 2023,” said Alberto Ramos, head of Latin America economics research at Goldman Sachs.
It may seem paradoxical, as MB Associados says, but the stronger GDP not necessarily changes the perspective of interest rate declines starting in the second half of the year, since the bumper harvest is helping food prices fall and services continue to weaken. “GDP grew where it needed to grow to help inflation dynamics,” the consultancy said.
*Por Alessandra Saraiva, Anaïs Fernandes, Lucianne Carneiro, Marcelo Osakabe, Marsílea Gombata, Marta Watanabe, Rafael Rosas, Rafael Vazquez — São Paulo, Rio de Janeiro
Source: Valor International