Economists estimate an impact of 0.2 to 0.3 percentage points driven by agribusiness
05/10/2024
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The Central Market is flooded after heavy rain in Porto Alegre — Foto: Andre Penner/AP
The impact of the floods in Rio Grande do Sul, the state with the fourth-largest share of Brazil’s Gross Domestic Product, on the national economy may range between 0.2 and 0.3 percentage points, according to preliminary estimates. That could put in check the possibility of a GDP growth above 2% for 2024, despite the resilient general activity.
XP Asset has revised its projection for Brazil’s GDP this year to 2.1% from 2.4%. While the previous expectation was for growth of 0.7% in the second quarter compared to the first, the financial firm now expects a drop of 0.2%. “And I think the impact could be even worse than our estimates suggest,” said chief economist Fernando Genta.
That is because the estimate considers rather the direct effect of the floods on the economy of Rio Grande do Sul than an overspill into other areas, Mr. Genta explains. For example: as the annual minimum wage raise is already given, the increase in food prices due to problems with crops in Rio Grande do Sul could lead to a deterioration of households’ purchasing power and, therefore, affect consumption in the GDP.
Fernando Fenolio, chief economist at Wealth High Governance, estimates that the adverse impact could vary from 0.02 percentage points on the national GDP, if there is a full recovery of industrial capacity in Rio Grande do Sul and a 25% loss of the remaining local harvest, to 0.34 percentage points, if the loss of the remaining harvest is complete and industry recovery does not exceed 25%.
An impact of 0.22 percentage points, caused by a total loss of the remaining harvest, although with 75% recovery of industrial capacity, seems a more likely scenario at the moment, according to Mr. Fenolio. “We will review our GDP projection. It could go to 1.8%, compared to the 2% we were expecting for this year, mathematically,” he said. Inflation, in turn, would shift to 4% from 3.8%. “It’s a classic supply shock, less GDP and more inflation.”
In preliminary estimates by 4intelligence, the Rio Grande do Sul’s GDP growth could reach just 0.5% this year, from 5.5% previously projected, due to the disaster. Considering that the state accounts for around 6.5% of the national economy, the floods could reduce Brazil’s GDP growth by 0.2 percentage points in 2024, according to the estimates. As a result, 4i’s official projection of a 1.9% increase in Brazil’s GDP this year could be reduced to 1.7%.
“The main impact on activity will occur in May. In June, we believe that most activities will be back to normal, depending on the material damage and the pace of reconstruction,” Bradesco said in a report. The bank also sees a potential impact of 0.2 to 0.3 p.p. on the Brazilian GDP as a result of the disaster.
G5 Partners has a similar estimate, indicating a loss of 0.3 percentage points. “As we have never experienced a natural disaster of the magnitude seen in Rio Grande do Sul, we sought references from other locations. We used the effects of hurricanes Katrina and Rita in the U.S. in 2005 as examples,” said Luis Otávio Leal, G5’s chief economist.
Based on a study by the U.S. Department of Commerce, which measured the impact of these hurricanes on the U.S. GDP quarterly, and adapting to metrics in Brazil, Mr. Leal estimated that the floods could take 10.5 percentage points off the variation in Rio Grande do Sul’s GDP in the second quarter of 2024, compared to the first quarter. As a result, his projection for the Brazilian GDP growth in 2024 would fall to 1.8% from 2.1%.
G5 did not change the estimate, but, before the floods, the firm was expecting to raise its annual forecast for national GDP following the release of official data for the first quarter.
“I believe the comparison with the effect of hurricanes Katrina and Rita makes sense, as there was similar material damage. However, the estimate does not consider other variables, such as the difference in the countries’ ability to act,” Mr. Leal points out, as the U.S. has an organized structure to act in cases of disasters like this.
According to Banco Pine, the projection for Brazil’s GDP growth in 2024, of 2.3%, can be revised to 2.1%, in an initial estimate.
“The impact tends to be mitigated for the national GDP. Regionally, it’s much more, and thinking in trillions of reais, there’s a loss of wealth. But I’m even more concerned about agribusiness,” said the chief economist of the bank, Cristiano Oliveira. He notes that if the state accounts for 6.5% of the national GDP, its participation in the agricultural GDP is almost double, around 12.5%.
Considering the state alone, 4i estimates that the most affected sector will be agriculture, which could grow 25% less than expected in the second quarter. “Rio Grande do Sul’s agricultural GDP, alone, was expected to grow 18.9% in 2024, recovering from a giant crop failure in 2022 that was not entirely replaced in 2023. Now, the increase could be just 1.9%,” said Bruno Lavieri, 4i’s chief economist.
Assuming that half of the unharvested crop on the fields has been lost, 7.5% of rice production and 2.2% of soybeans in Brazil could be impaired, according to Bradesco. The bank argues that these estimates may still be conservative.
With that in mind and considering a possible impact on wheat planting, which has just begun, and on the slaughter of chicken and, mainly, pigs, Bradesco estimates that the drop in Brazilian agro GDP in 2024 could aggravate to 3.5% from the expected 3%.
“There is also all the infrastructure involved in agribusiness, with storage silos, roads, and energy transmission. All of that should be impaired for some time,” said Mr. Oliveira of Pine. Therefore, he says the effect of the disaster on GDP tends to “last longer and worry more” than on inflation.
In services, transportation is likely to struggle for longer due to road closures. In services provided to households, activities related to leisure, hospitality, and personal services could also be strongly impacted, Bradesco points out. 4i’s projection for services in Rio Grande do Sul was reduced to a drop of 3.1% in the year from an increase of 1.9%, with losses concentrated in the second quarter.
The industry could be less impacted: the estimate for 2024 was reduced to 1%, from 1.8%. “Extractive activities have almost no weight in the state, while manufacturing, which is important given vehicle and machine production, should experience a specific impact and recover in the future, as demand was only pent-up. Furthermore, we should see some boost in construction, as the damage should boost construction works,” said Mr. Lavieri.
For 2025, 4i raised its GDP forecast for Rio Grande do Sul to 6.1% from 2%. “We maintain our projection for services and industry, which should grow a little less in 2024, but would recover next year. Agriculture is expected to continue below what was initially expected,” said Mr. Lavieri.
“Agribusiness in the region will likely suffer the consequences of the current event for many months to come, maybe casting doubt on the success of the next harvest,” said Mr. Oliveira. He points out that the La Niña phenomenon is expected to return in July, making the weather dry in Rio Grande do Sul. Although this could seem positive given the damages caused by excessive rainfall, it harms crops. “Unfortunately, extreme weather events tend to hit the state hard given its location,” he said.
* Por Anaïs Fernandes, Marcelo Osakabe, Marta Watanabe — São Paulo
Source: Valor International