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GDP expected to slow down after Q2 growth

Projections indicate that economy’s performance in first half will drive year’s result

08/30/2022

The good performance of the Brazilian economy in the first half of the year may account almost alone for GDP growth in the full year 2022. The dynamism bolstered especially by the services sector, however, is not expected to remain in the second half, when the lagged effects of monetary tightening are likely to start appearing more consistently. Meanwhile, uncertainty grows due to the elections and factors such as the momentum of economic reopening lose effect.

The median of 75 estimates collected by Valor points to a GDP expansion of 0.9% in the second quarter compared with the previous quarter. This way, the average point for the year-end result, based on 80 estimates, reached 2.1%, compared to 1.4% at the end of May. Of these, only 16 are below 2%.

Last quarter showed widespread growth, with services, industry, and farming standing out, said Lucas Maynard, an economist at Santander. In services, he points out the reopening of the economy, the increase in disposable income as the labor market improved, and the effects of fiscal stimuli, such as the early payment of the 13th salary (a mandatory year-end bonus for formally employed workers) and the authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts.

The higher income also favors the consumption of industrial goods, a sector that has benefited from the improvement in global logistical hurdles caused by the mismatch between supply and demand. Inventory data, says Mr. Maynard, suggest a gradual normalization of the production chains. Industry, in particular, had a better performance in the first half of this year, unlike the second half of 2021, when it was affected by lower income and the preference for services in the consumption mix.

Santander projects growth of 1.1% for the second quarter of 2022 and expects GDP growth of 1.9% for the year. The statistical carryover for the second half is 2.3%. That is, with zero growth in the second half, this would be the country’s GDP growth.

Fernando Honorato — Foto: Carol Carquejeiro/Valor

Fernando Honorato — Foto: Carol Carquejeiro/Valor

Besides the broader factors amid a set of government measures, a structural component played a role: the surprising dynamism of the labor market recently, said Fernando Honorato Barbosa, the chief economist at Bradesco. “I see two reasons for the good moment of employment. On the one hand, the overhaul of labor laws brought more flexibility in hiring and firing and reduced costs for businesses. On the other hand, the relative price of wages compared to investments shows that today it is more beneficial to hire.”

“If we take, for example, FGV’s level of capacity utilization indicator Nuci, we see that it is above 80%, which should drive investments. But businesses have preferred to hire, and this has not only to do with the overhaul. Salaries are close to the levels seen in 2012,” he said. In July, the industry’s Nuci hit 82.3%, the highest since March 2014.

If the first and second quarters surprised to the upside, the following period is surrounded by uncertainties. This is because the effects of the Central Bank’s monetary tightening are expected to become more intense, while the push given by the post-Covid reopening ends and the uncertainties regarding the elections slows investments. Not coincidentally, the median of the 67 projections suggest a 0.2% GDP growth in the third quarter.

What complicates the reading is that, in the opposite direction of these factors, there are issues such as the higher cash transfers through the social program Auxílio Brasil, of R$600 as of August, tax exemptions, and the deceleration of inflation, which is likely to give an additional boost to activity. On the external front, the tightening of global monetary conditions that was taking shape at the end of the first half of the year was also attenuated — at least for the time being — by a slightly more dovish stance by the Federal Reserve, the U.S. central bank. Because of this, some economists believe in a bullish bias for the numbers for the period.

4Intelligence’s current estimate is for a 1% contraction in GDP in the third quarter, but the figures do not account for possible cross effects from Auxílio Brasil, said analyst Wellington Nobrega. “With falling inflation, a heated labor market, and the government’s countercyclical policies, household consumption may do better than projected today.”

Fernando Rocha, the chief economist at the asset management JGP, also disagrees with the thesis of a “sudden blackout” in the second half of the year. In his calculations, the GDP grew 0.6% in the second quarter, seasonally adjusted. Considering the result of the first quarter, this generates a statistical effect of 1.9% for the second half, he said.

In his view, the deceleration will be more gradual than imagined. Job generation has been strong, surprising month after month, and this increases the total wage bill and props up demand for services, he said. Mr. Rocha expects GDP growth of 0.4% in each one of the next quarters. Thus, JGP’s official projection for 2022 is 2.2%, but the rate could reach 2.5%.

Another factor that could support activity in the third and fourth quarters is local government investment, which saw a boost earlier this year, said Stephan Kautz, the chief economist at EQI Asset. “Spending by municipalities was very strong. It could generate a statistical effect for the second half of the year and make Gross Fixed Capital Formation surprise this year.” That said, the asset management company expects that this set of factors will not be enough to offset downside factors. Considering negative data and reports that are already emerging in retail and construction, the company projects a 0.1% expansion in the third quarter.

Looking ahead to 2023, estimates have also deteriorated. The median of the 78 projections showed a 0.4% expansion, compared with 0.7% in the previous survey.

In addition to the contractionary effect of monetary policy, which will reach its maximum effect in early 2023, the uncertainty about the economic policy of the next administration is weighing on estimates, said Mr. Honorato, with Bradesco. In his opinion, question marks about what lies ahead will not be solved with the election results.

“We still don’t have details about this new arrangement, and I believe that the uncertainty will remain until the first half of 2023. The new administration could build an enormous market confidence, so that the exchange rate appreciates, inflation falls faster and so does the [policy interest rate] Selic. It might not,” said Mr. Honorato, who sees zero growth in 2023. “The point is that, with fixed interest rates at 7.5% and long rates at 6%, it is undeniable that uncertainty is there and will affect the economy.”

Santander estimates a 0.6% contraction, but with an upward bias. Among the factors playing against next year’s GDP growth are the exhaustion of the effects of the reopening of the economy and the still unfavorable situation abroad, Mr. Maynard said.

EQI is more optimistic, with a forecast of a 0.9% GDP growth. “We believe that agriculture will again have a good year in 2023, growing close to 3.5%. The high interest rates are less relevant for the segment, which has directed credit. Besides this, the global slowdown affects more metallic commodities. The agricultural ones are better isolated,” he said. “Agribusiness has a smaller relative participation in the economy, but it generates positive, indirect effects as well.”

*By Marcelo Osakabe, Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Economists expect GDP downfall in second half

Economists were taken by surprise with the data for the Brazilian economy, especially in March, and raised their projections for the GDP in the first quarter of this year, opening space for a more positive view of the activity both in the following three months and in 2022. The year, however, is likely to have two opposite configurations: a stronger economic performance in the first half of the year and a likely technical recession (two consecutive quarters of falling GDP at the margin) in the second half.

The GDP is expected to have grown 1% in the first quarter of 2022, compared to the fourth quarter of 2021, seasonally adjusted, according to the median of the projections of 82 financial institutions and consulting firms consulted by Valor. Almost half of the respondents bet on even higher increases, with the maximum reaching 2.6%, for a minimum of 0.1%. Only two banks expect a drop. In comparison with the same period in 2021, the median of the projections of 76 institutions indicates a high of 1.7% from January to March this year.

The forecasts for the GDP in 2022 have moved a lot and in a short time. Since the last Valor survey, with 72 institutions and published on May 12, the median went to 1.4% now from 0.8%, with 96 estimates. The projections vary from zero to 2%. The Central Bank’s Focus survey, which serves as a compass for the market and the monetary authority, usually has between 80 and 100 respondents, but has not been published since April 29 because of the civil servants strike.

The GDP increase in the first quarter is expected to be boosted on the supply side by services, which, according to the median, rose 1% compared to the fourth quarter of 2021 (3.3% compared to the first quarter of last year). “Transportation is likely to lead, which has to do with the return of circulation and a boost from e-commerce to the postal services. And there is a big highlight for “other services’, which include those provided to families and which went through a certain euphoria after the omicron wave,” says Tiago Negreira, partner and economist at Macro Capital.

Even trade — which is part of services in the National Accounts — will probably offer a positive contribution for the quarter compared to the end of 2021, he says. “The drop in unemployment seems to be contributing, with recovery in the total wage bill, in addition to the government’s own aid programs, authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts, but that is something for the second quarter.”

The recovery in services (although somewhat delayed by the omicron) was already on the radar, so that, for Pedro Ramos, chief economist at Sicredi, there were surprises in other segments as well. “Industry had shown weakness in previous quarters and there was a moment when it was thought that agribusiness might weaken, because of crop failures, but we should still see growths on the margin and we may have record harvests in the year,” he says.

Valor’s survey indicates a rise of 0.4% in industry and 1% in agriculture in the first quarter, compared to the three immediately preceding months. In relation to the first quarter of 2021, however, they are expected to fall by 1% and 3%, in that order.

On the demand side, in line with the expansion in services and a more resilient trade, the positive contribution to the GDP from January to March should come from household consumption. The median expectation is for 1% growth in the margin and 2.5% in relation to the same period in 2021.

The Gross Fixed Capital Formation (GFCF), on the other hand, is expected to remain stagnant in the first quarter, which, according to economists, is not necessarily a bad thing: “It rose 17% in 2021, it was at a very high level. If you think that this investment was raised based on interest at 2% and a lot of transfer to the economy, we could imagine that, when the Selic reached the level that we project, this will go down,” says Mr. Ramos.

The GDP of the first quarter will be very important for the growth of the year, according to Luana Miranda, economist at GAP Asset. Based on data from the fourth quarter of 2021, the carryover for 2022 was 0.3 percentage points. With the consolidation of the first quarter, for which GAP expects a high of 1.3%, the carryover would rise to 1.9 points, according to Ms. Miranda.

“We do not have a high projection of 1.9% of GDP this year because we expect a fall in the second half due to the lagged impacts of monetary policy,” she says, predicting a 1.5% growth in Brazilian activity in 2022.

Ms. Miranda recalls that, after the better-than-expected result in the first quarter of last year, there was a wave of optimism that pushed up the GDP estimates for 2021. One has to be careful with that, she says. “I believe the first half of the year is given and will be good. The question is what the impact will be in the second half.”

Preceding data shows household services still in the spotlight in April, Ms. Miranda says. For the second quarter GDP, the median expectation of economists is a deceleration, but there would be a rise of 0.4%, compared to the first quarter.

“The carryover from the first quarter to the second quarter is positive, but the growth factors are already starting to become more limited,” says Mr. Negreira, with Macro Capital. The manager, who projects 1.9% for the GDP in 2022, expects, as do most economists, contractions in the third and fourth quarter of the year.

Besides monetary tightening, the exhaustion of the process of reopening services and the uncertainties surrounding the electoral process will probably weigh. One question is also whether the labor market will remain resilient given the worsening financial conditions, Ms. Miranda notes. At some point, she says, this will hit the companies.

Tendências Consultoria, which has a more modest GDP estimate for 2022, of 0.6%, highlights the role of inflation, systematically revised upwards, in the perspective of weaker quarters ahead. The international scenario is not very helpful either, points out economist Thiago Xavier. Despite bringing commodities up, it has been, he says, the stage for downward revisions of growth, inflation upwards, with monetary tightening. “The world, from the point of view of growth, has been a frustrating and limiting factor for the Brazilian GDP.”

Source: Valor International

https://valorinternational.globo.com

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Brazil may need to sacrifice GDP growth to tame inflation

Solange Srour — Foto: Silvia Costanti/Valor

Solange Srour — Foto: Silvia Costanti/Valor

Faced with a complicated scenario for inflation, which threatens to stay above the target cap for the third year in a row, as well as an exchange rate that may remain depreciated, despite a super-attractive interest differential compared to foreign countries, Brazil may face the possibility of having to “sacrifice” economic growth to control the pace of price hikes. This analysis comes from Solange Srour, chief economist of Credit Suisse Brazil. According to her, the country may have to face expansion rates around 1% or below in the coming years to enforce the target system.

The higher- than-expected reading of mid-month inflation index IPCA-15 for May strengthened the understanding that the Central Bank, contrary to its recent communication, will need to extend the monetary tightening cycle until August.

This change is close to the scenario already outlined by the Credit Suisse team, for whom the monetary authority will end the tightening cycle with the Selic interest rate at 14%. Despite the fact that the price dynamics continue to be qualitatively bad – a deflation was expected in May, but it does not look like it will happen – the economist sees a low chance that the cycle will extend much beyond its current projection.

On the other hand, Ms. Srour believes that the idea of trying to “exchange” an additional increase in the Selic in August for a more distant start to the cycle of cuts is risky. A recent study by Credit Suisse shows that since 1999, when the inflation targeting regime was implemented, the Central Bank has never ended a tightening cycle before seeing expectations stabilize or converge back to the target – which is not the case today. The same happens with the break-even inflation measures, which continue to deteriorate. “If the Central Bank stops in June, it will need to change communication,” she says, citing the decision to bring forward the change of monetary policy horizon and also new inflation projections.

Read the main excerpts from the interview below:

Valor: Credit Suisse recently raised its 2022 GDP projection to 1.4% from 0.2%, but cut 2023 projection from 2.1%. That is, the fall next year will more than offset the rise this year. Why is that?

Solange Srour: Starting in the second half of the year, we will see not only the lagged effect of monetary policy on activity, but also the high inflation starting to strongly affect disposable income. At the beginning of the year, it is harder to notice this because most salaries are raised by June and July, so people feel they have a higher income, then consumer spending gains steam. But as the year comes to an end, this is lost. Another factor that holds back GDP expansion next year is global growth. We are seeing substantial revisions of projections, this year driven by China and Europe, next year more by the United States, because we believe that the monetary policy there will be tighter than anticipated. Besides this, we cannot rule out the uncertainty about the prevailing agenda in Brazil from 2023 on. Today, this seems to be a topic that the market does not want to discuss much, but it certainly affects investment and consumer spending decisions. If there is too much uncertainty, this affects current activity. Current investment is not so weak because the commodities sector has holding up the ends, but the other industries already see a relevant drop, which is likely to be accentuated in the second half of the year. Considering a real interest rate of 6% in the next few years, it is very difficult to think of a higher growth rate than something close to 1%, which is what we project for 2023. On the contrary, we risk seeing a lower rate than that.

Valor: Why will we need to keep real interest rates so high?

Ms. Srour: Every time Brazil had a real interest rate as high as the current one, we also had a very expressive currency appreciation that helped to bring down inflation. This time, we see real interest rates high for a long time without a strong real. It reached R$4.6 to the dollar just to return to R$5, and is still oscillating. A stronger real is not enough. It must be seen as something more permanent in order for us to see a pass-through effect. The price takers need to see a consistent appreciation in order to pass this on to prices. There is a lag in all of this. So, if this happens, it will help a lot. If it doesn’t, the weight will fall on activity. A 1% growth is not enough to bring inflation down fast. Without a strong real, disinflation is going to be much more costly, slower and gradual, especially because inertial inflation increases after two and a half years of very high inflation.

Valor: Why do you believe the real will remain weak?

Ms. Srour: If you look at the fundamentals of a given model, commodities and real interest differential, the real should have been stronger in the past two years. There are several reasons for that. The main one is the uncertainty about what Brazil will be like over the next few years. It is very difficult to draw medium-term investments if it is unclear what is going to happen. Much of this uncertainty is related to the fiscal situation. As much as the spending cap [a rule that limits growth in public spending to the previous year’s inflation] is up, several expenses are held back, including pay increases for civil servants. There are also developments out there. The tightening of the U.S. monetary policy may strengthen the dollar, should the Federal Reserve need to tighten further than expected. And the slowdown in China may also be longer and start in 2023, which also makes it more difficult for the real to appreciate.

Valor: We have seen a very intense cycle of Selic (Brazil’s benchmark interest rate) hikes in the last months. Wasn’t it time for it to start having an effect on the activity?

Ms. Srour: I don’t think that it is not having an effect. Credit is more expensive, spreads are on the rise. The activity is not showing that because the effect of the opening has been much more intense and much slower than expected. Economists thought that the effect of the reopening on the economy would peak between January and February, but people seem to have accumulated some savings, so we see a very strong effect in services and consumer spending. This is not happening in Brazil alone. The same happened in Europe, where recent indicators from some countries did not come as bad as expected, precisely because of the longer effect of the opening.

Valor: In its statements, the Brazilian central bank has been trying to support a longer cycle of high Selic instead of additional hikes later this year.

Ms. Srour: Our study shows that in all monetary tightening cycles, the monetary authority paused when the difference between inflation expectations and the target was falling. In the current cycle, the Central Bank is trying to end the tightening while the gap is still rising. If this happens, it will be the first time. We believe this is complex, dangerous, considering that we have been missing the [inflation] target for two years. It is complicated to stop the cycle with expectations still rising and risking being above the target for the third year in a row. We have projected that the Selic would rise by August for some time now, which has now become a more consensual scenario. The [last reading of] IPCA-15 [Brazil’s mid-month inflation index, known as a reliable predictor for official inflation] was qualitatively bad and is likely to worsen projections for 2023.

Valor: Will the Central Bank still follow the path it has communicated?

Ms. Srour: If the Central Bank stops in June, it will need to lengthen the convergence period, admitting that the monetary policy horizon is now 2023 and also, to some extent, 2024. This is something we expected to happen in August, which is when the Central Bank typically starts to give more weight to the following year. So it will need to say that, or even that it will pursue this adjusted target, and no longer that of 2023. I think it is more likely to lengthen the horizon, but this will only be more credible if it puts projections closer to those of the market – today the Central Bank’s projections are very far from them. If the Central Bank wants to signal that it will stay put for a long time, but its projections are low, nobody will buy this for a long time, since the Central Bank’s own projections allow it to start cutting earlier as well. That is why I think it is very complicated to reconcile all this: to stop rising in a bad environment, with expectations moving away from the target, and to extend the horizon as it argues that it will stay still for a longer time to try and prevent expectations from unanchoring further.

Valor: Do you see any chance of the Selic going beyond the projected 14% a year?

Ms. Srour: I do not think the Central Bank will go much beyond 14%. We cannot rule it out at all, given what we have seen about inflation in Brazil and in the world. But I think it is very difficult to go beyond this because the Central Bank has communicated that the cycle is nearing its end, financial conditions are tight and this is going to have an impact on activity – it should already be influencing it, but some extraordinary factors, mainly fiscal, are preventing this. The real ex-ante interest rate is at a very high level, close to the peak. But we cannot rule out that the next move will be a hike, or that the cycle will stop for very long, especially because it may stop for the first time with a very large gap between expectations and the target.

Valor: How do you see the new change of Petrobras CEO?

Ms. Srour: We are facing a global problem of energy and food prices. Several countries, supported by international mechanisms, are creating policies to mitigate this shock. I believe Brazil should be adopting some more transparent measure for the budget, as was done by [President Michel] Temer at the time of the truck drivers’ strike. It could be even an extraordinary credit, instead of trying to make Petrobras hold prices or reduce taxes, because tax collection is surprisingly well, but this is something temporary, and tax breaks tend to be more permanent. A transparent mechanism avoids a greater impact on inflation and also a greater political impact.

Source: Valor International

https://valorinternational.globo.com

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GDP survey shows stagnant economy

Claudio Considera — Foto: Leo Pinheiro/Valor
Claudio Considera — Foto: Leo Pinheiro/Valor

The economic activity fell 1.4% in January compared to December, according to GDP Monitor — an indicator calculated by think tank Fundação Getulio Vargas (FGV) to measure the monthly evolution of the economy, unveiled on Monday.

Claudio Considera, the economist in charge of the readings, says that the result indicates stagnation in the economic activity in early 2022. This is because there are no signs of robust reaction in key segments of the economy, such as household consumption and services economy — the latter representing more than 70% of the GDP.

According to him, Brazil does not have, at the moment, conditions for sustainable growth this year, and is expected to end up with a variation close to zero in the GDP in 2022, compared to last year. “We have today a perfect picture of a totally stagnant economy,” the specialist said.

FGV also unveiled that, in the GDP Monitor, the economy grew 1% in the moving quarter ended in January, compared to the one ended in October 2021. Compared to January last year, the economy grew 1.2% in January this year, with expansion of 2% in the quarter ending in January, compared to the same period in the previous year.

Mr. Considera said, however, that those increases are favored by the low base of comparison, referring to last year, and do not represent the economy accelerating at the beginning of 2022.

This is because the faster advance of vaccination against Covid-19 only happened in mid-2021, when the gradual reopening of the economy began to take place, as people went back to work and restrictions on circulation were eased. Immunization against the disease started in Brazil only in January last year — a month in which the economy, especially in the commerce and service sectors, was operating at a weak pace, hampered by the pandemic, and was strongly affected by social distancing measures designed to contain contagion.

On the demand side, one factor that help form the current moment of weaker activity is the weakening of household consumption at the beginning of the year, Mr. Considera said. In the GDP Monitor, in January, household consumption fell 1.3% compared to December last year.

There was an increase of 2.2% compared to January 2021, but the analyst said that the use of a low base of comparison influenced upwards the high results seen in the indicator in January 2022. In the moving quarter ended in January versus the one ended in October, household consumption grew only 0.8%.

“Household consumption is falling, and now with higher inflation it will be even harder to grow,” he noted, adding that higher inflation leads to lower real household income. “We are not seeing any sign of improvement [in family consumption],” he said.

Another aspect Mr. Considera mentioned was the Russia-Ukraine war, which has led to a surge in the price of oil abroad and to increases in fuels in Brazil. As long as the war goes on, the price of a barrel of oil in the foreign market may remain high, making prices soar in the Brazilian domestic market, he said.

On the demand side, the services sector is not showing good signs on the margin either. In January, this activity fell 1.7% compared to December last year in the GDP Monitor.

According to Mr. Considera, the factors at the moment indicate that the country does not show the necessary conditions to grow above 1% a year in 2022. “I don’t see conditions to strongly grow this year. We are expected to have a very weak growth of 0.6%, 0.7% [in the 2022 GDP],” he said.

Source: Valor International

https://valorinternational.globo.com

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Government cuts estimate for GDP growth in 2022 to 1.5%

In the wake of the Russia-Ukraine war and the economic slowdown at the end of last year, the Bolsonaro administration has cut its estimate for GDP growth in 2022 to 1.5%, from the 2.1% previously projected. Despite the cut, the government’s expectation remains well above the 0.49% expected by the market, according to the latest Focus survey with analysts.

At the same time, expectations for inflation in 2022 have risen. In the projections of the Ministry of Economy, Brazil’s benchmark inflation index IPCA stood at 6.55%, compared to 4.7% expected in November. The National Consumer Price Index (INPC) reached 6.70%, against a projection of 4.25% in November, and the General Price Index – Internal Availability (IGP-DI) is expected to close the year at 10.01%, against 5.42% estimated previously.

Valor had previously reported that the government admitted a reduction of 0.5 percentage points in the growth this year, because of the war in Ukraine.

The conflict has already impacted the economy and will continue as a risk factor, said Pedro Calhmann, the secretary of Economic Policy. Besides driving inflation around the world because of the rise in commodity prices and bringing volatility to the fuel market, there are other risks: disruption of global value chains, deterioration of financial conditions and impacts on international trade and the balance of payments in Brazil.

The pandemic also continues as a risk factor to be followed, he said. It could impact growth and inflation.

Besides the effects of the war, the revision of the GDP is explained by the revision of the national accounts data by the Brazilian Institute of Geography and Statistics (IBGE) and also by the weaker activity seen at the end of 2021.

Fausto Vieira, the undersecretary of Macroeconomic Policy of the Ministry of Economy, said the government projects growth of 0.5% in the first quarter of 2022. This scenario includes growth of agribusiness (2%) and services (0.4%) and contraction of the industry (-0.8%). Economic growth in 2022 will be led by the recovery of the labor market and private-sector investments, the Ministry of Economy said.

Investments are growing because of the concessions program, said Mr. Calhmann. The contracts already signed contain commitments for expansion, and improvement of the structures granted that. In 2022 alone, those commitments reach R$78 billion. This is equivalent to a 2.3% growth in investment, with an impact of 0.45% in the GDP, he highlighted.

It is important that the government continues on the path of fiscal sustainability in order to have a medium and long-term scenario that is friendlier to investment, the special secretary of the Treasury and Budget, Esteves Colnago, says. “In January 2022 we are almost at zero deficit and heading towards surplus,” he said. But, he added, the scenario is challenging and “we need to see how it will progress.”

Since August 2020, 11 million jobs have been created, Mr. Vieira pointed out. “The participation rate is close to the historical average, but we believe it will continue to grow reaching similar levels to 2018 and 2019.” The country, however, still has a high unemployment rate. In 2021, the average annual rate was 13.2%, compared with 13.8% in 2020 and 12% in 2019.

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Brazilian GDP expected to rise 4.5% in 2021

What is Gross Domestic Product, and what does it measure?

The Brazilian economy is expected to have closed 2021 at a faster pace in November and December, offsetting the weak performance in October. In the year, GDP growth is expected to have reached 4.5%, after the 3.9% drop with the pandemic in 2020.

For this year, expectations still tend to shape in the coming days depending on the evolution and consequences of the war waged by Russia against Ukraine. One reading is that the pattern of last year will be repeated in Brazil: growth concentrated in the first quarter, but with the GDP ending the year much weaker. Another reading, which can take shape, is that the conflict will undermine the drive expected for activity at the beginning of the year.

A survey by Valor with 67 financial and consultancy firms shows a median projection of 0.2% GDP growth in the fourth quarter of 2021, compared to the immediately previous three months, seasonally adjusted. In the second and third quarters, there were drops by 0.4% and 0.1%, respectively.

On the supply side, agriculture is expected to grow 6.1% from October to December 2021, but the sector has seen significant declines in previous quarters, explained by adverse weather events and harvest losses, which will still make the agriculture GDP fall 0.2% in the year, analysts estimate.

Industry even managed to grow in December, but it is unlikely to be enough to prevent a 1.5% contraction in the fourth quarter of 2021, compared to the third quarter, according to estimates. The industry suffered throughout the year with bottlenecks in global production chains. Still, after contracting 3.4% in 2020, it is expected to increase by 4.4% in 2021.

More sustained growth, however, must come from services. While the sector may slow down from a 1.1% rise in the third quarter to a 0.2% rise in the fourth, according to projections, it would end 2021 up 4.6%, after a drop of 4.3% in the previous year. “A good part of this fourth quarter result is supported by services, which should still follow in pace of recovery with vaccination. But for the rest, it’s an very weak picture,” said Marcos Ross, chief economist at Haitong. He sees GDP up 0.3% in the fourth quarter of 2021.

On demand side, in the last three months of 2021, only government consumption (up 0.4% from the third quarter) and imports (1.8%) are seen as not contracting. Gross fixed capital formation (GFCF, a measure of investment) is expected to fall 0.1%, while household consumption is expected to drop 0.1%, and exports to decline 2.7%. In 2021 as a whole, however, investments are expected to rise 16.6% after falling by 0.5% in 2020, while household consumption is expected to rise 3.4%, only partially recovering the 5.4% loss in the previous year.

Like Mr. Leal, Flávio Serrano, chief economist at Greenbay Investimentos, says that activity indicators in the fourth quarter reinforce the idea of exhaustion of fiscal stimuli that helped to avoid even greater losses in 2020. He sees, however, the possibility of a 0.1% contraction of GDP between October and December 2021, compared to the previous three months.

Depending on the GDP result for the fourth quarter, the change in growth forecast for last year as a whole would just be “a fine adjustment”, says Mr. Ross, with Haitong. “The things is to determine whether the growth was 4.5% or 4.6%. It even looked worse, which would be below 4.5%, but the November and December data show that perhaps it was not. But if you think about a broader discussion, it doesn’t make much difference.”

The end of 2021 is likely to leave a “statistical carryover” of 0.1% for 2022, a number that has already been negative in the economist’s accounts. “It’s a detail for the better, but it shows that there’s a growth problem yet to be solved,” says Mr. Ross. Although the December numbers have “a kind of positive feeling,” this is not a perception likely to be sustained in 2022, according to him.

The consequences of the war may prove to be a problem for Brazil, due to the potential pressure on energy and grain prices. And even though Brazil’s trade relations with Russia and Ukraine are limited, the conflict tends to weaken the pace of the economies of several countries more dependent on trade with the Russians – which would also have a secondary effect on activity in Brazil.

In addition to the potential damage of the war, 2022 had already begun under the effect of the triggering of contaminations by the omicron variant. But José Pena, chief economist of Porto Seguro Investimentos, believes that although January may have lost a little steam because of the pandemic outbreak, it was not to the point of having compromised the activity. Mr. Pena projects a GDP close to stability in the period and says he is cautious about the rest of the year.

The survey carried by Valor points to a median growth of 0.3% for the 2022 GDP. Mr. Ross projects a 0.1% rise from January to March, compared to the fourth quarter of 2021, and sees a contraction of 0.4% in the Brazilian activity this year. The effects of the monetary tightening throughout 2021 will be more evident in activity in 2022 and are expected to be boosted by high indebtedness and lower credit supply, points out Mr. Serrano, with Greenbay, who also foresees a 0.5% drop in GDP in this year.

Mr. Leal projects a 0.3% increase in GDP in the first quarter of this year, with seasonal adjustment. The same variation is estimated for the activity in 2022. But he recalls that projections for this year still do not consider possible effects of the war between Russia and Ukraine. It is still uncertain, for example, how long agricultural commodities and oil prices can stay higher, which affects global and domestic inflation. This scenario, accompanied by a devalued exchange rate due to risk aversion, can lead to a higher interest rate than expected for the year, he notes, which would further restrict activity.

Mr. Leal says he believes the peak impact of the current monetary tightening cycle on the economy is likely to happen between the second and third quarters of this year. “The question mark is the repercussion of this for the 2023 economy.”

Source: Valor International

https://valorinternational.globo.com

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Economists review contribution of agriculture to GDP

Minus 23.9 per cent: In falling GDP, Agriculture output is only positive | Business News – India TV

The contribution of agriculture – considered by economists as a pillar of the economic activity this year – to Brazilian GDP is now seen as a question mark due to the excessive rainfall in some regions and drought in others. The prevailing view is that the sector will have a positive 2022, but not as good as previously expected, which is driving downward revisions.

This week’s change in BNP Paribas’s forecast for Brazil’s GDP this year, which went to -0.5% from +0.5%, includes a revision in the agro GDP to 1.5% from around 5%, said Gustavo Arruda, head of research for Latin America at the bank. “We were quite surprised, it changed very fast.” He estimates that agriculture directly took 0.2 percentage point from its GDP projection. Considering indirect effects — on the industry, for example, as tractors play an important role in car production, Mr. Arruda says — the negative impact could be closer to 0.3 pp.

Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV) still maintains a positive total GDP for 2022, but has adjusted the estimate to 0.6% from 0.7% because, among other things, the revision of agricultural growth to 3.5% from 5%.

Barclays, which revised its projection for the Brazilian GDP in 2021 to 4.3% from 4.5%, kept its forecast at 0.3% for 2022, but says it is monitoring potential negative risks. Among them, in addition to the omicron variant, Roberto Secemski, the bank’s chief economist for Brazil, cites “extreme heat and drought conditions in southern Brazil threatening soybean and corn production, which normally lead agricultural gains in the first quarter of each year.”

Under the natural phenomenon La Niña like now, the typical impacts are exactly drought in southern Brazil and rainfall in the Northeast region, said César Castro, an agro specialist at Itaú BBA. “In 2021, the effects of La Niña were milder.”

In Brazil, Mr. Castro said, the bulk of the grain crop comes first from soybeans in the Cerrado region and then from the second yearly crop of corn, which is sowed now and harvested just before the middle of the year. In the South region, where the drought is very severe, however, the picture of “more soy, less corn” is a little different. There, the first corn crop alone may already total between 25 million and 30 million tonnes, while corn’s second crop could reach 80 million. “Those 30 million are suffering a lot,” the analyst says.

As a result, he said, the projections for Brazil’s first corn crop face downward revisions of up to 5 million tonnes, while the soybean crop is now expected to shrink by around 10 million tonnes. “Everything regarding soybeans is happening now,” Mr. Castro said, noting that Paraná and Mato Grosso do Sul, the most relevant states for planting, are also suffering with the drought.

Even though the first corn crop is less representative in Brazil, it has the important role of “creating a cushion” until the middle of the year for the demand of livestock, Mr. Castro said. “A big part of the corn issue in Brazil is solved in the second half of the year. Last year, there was a huge harvest loss, which meant that the cushion is very short. So, we are going to have a regional problem.”

Based on worsened estimates, Itaú Unibanco, which used to calculate an agriculture GDP growth in 2022 close to 5%, now foresees between 1% and 2.5%. “There is still uncertainty about how the IBGE revision will be,” said Luka Barbosa, an economist with the bank, mentioning Brazil’s statistics agency. In any case, the changes in projections for the agribusiness makes Itaú more comfortable with its estimate for the economy in general. “Before, we saw this strong agro GDP in 2022 as an upside risk to our projection of -0.5% for Brazil’s GDP. Now, we are much less worried,” he said.

Corn and soybeans crops under pressure led Itaú to revise its preliminary projection for this first quarter’s GDP to 0.4% from 0.7% — the number fell a bit more, to 0.3%, after considering additional data from other sectors. “It is still a positive first quarter, because of agribusiness, but less than before,” Mr. Barbosa said.

In its last report, on January 11, the National Supply Company (Conab) cut almost 7 million tonnes from its forecast for the grain harvest, to 284.39 million tonnes, which would still be a record number. These data, however, refer to the week to December 18, and further downward revisions are expected to occur, said Cristiano Oliveira, chief economist at Banco Fibra.

His projection for agriculture in the GDP, which was once of 4% growth, is now at 2.5%. This value is enough to put the Brazilian GDP very close to zero, but, taking into account the most recent information on some crops, Mr. Oliveira says he sees a slightly negative bias for the Brazilian economy in 2022.

Despite the importance of agribusiness for the Brazilian economy, it represents something close to 5% of the GDP, Mr. Oliveira said. “There is a chain, where the participation of agribusiness is greater. But, for the purposes of IBGE’s calculation of the GDP, this would be included in industry and services,” he said. Therefore, he says that one cannot “blame” agribusiness in case the GDP becomes negative this year.

Rabobank has been working for some time with a more conservative forecast for agriculture GDP in 2022, up 3.5%, coming from an expected drop of 0.5% in 2021, said Mauricio Une, the bank’s chief economist. “We are comfortable [with the projection]. With that, we have a total GDP this year around 0.6%,” he said.

In the soybean crop, for example, the projection is of a certain stability: 140 million tonnes, compared to 137 million tonnes last year, according to Mr. Une. “We still have a good year despite the drought. There is some support, which we have to monitor”, he said. Mr. Castro, with Itaú BBA, projects a soybean crop around 135 million tonnes. “We expected a slightly higher production than in 2021, but it’s still a reasonable number.”

Other crops, such as sugarcane and coffee, and cattle raising are likely to perform well, said Mr. Oliveira, with Fibra. Mr. Une notes that coffee is on a positive biennial basis in 2022 — the strongest harvest takes place every two years. “Last year, we saw frosts affecting coffee seedlings. For this year, we expect a recovery to 63.5 million this year from 57 million bags in 2021.”

The difficulties faced by corn tend to dissipate throughout the year, Mr. Castro said. If it is planted in the right window for soybeans, until the end of February, it creates a great chance of not suffering from drought or frost, the analyst said. “Since soybeans are being harvested and the weather outlook is relatively good from now on, we think there are conditions for the second yearly crop returning to normality,” Mr. Castro said. He projects 116 million tonnes of corn for 2022, compared to 87 million in 2021.

Mr. Oliveira, with Fibra, said that the second yearly crop of corn may benefit from stronger market prices. Prices for corn on Brazilian stock exchange B3 have remained at a relatively high level, as well as international values, said Mr. Une. “As much as there is this drop in volume expectations, we have a holding price,” says the Rabobank economist.

In the view of Mr. Arruda, with BNP Paribas, the behavior of the second yearly crop of corn, both in terms of damage by the drought and the increase in the cost of inputs, will be key to understand the dynamics of the year. “Agricultural margins will still be historically consistent, but well below 2021, because costs have risen too much, especially those of fertilizers and chemicals,” Mr. Castro said. Lower profits in agriculture reduce some of the “irrigation” that the sector manages to pass on to the GDP in the form of investments and hiring, Itaú’s analysts say.

Source: Valor international

https://valorinternational.globo.com/

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