Despite that, result propped up by services and employment is considered positive

11/28/2022

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Brazil’s third-quarter GDP growth is expected to slow down to half the rate of the previous three-month period, considering the projections collected by Valor and data released by the statistics agency IBGE so far.

This deceleration was already expected by economists due to external turbulences and Brazil’s very contractionary monetary policy. Even so, analysts believe that the third-quarter GDP growth might have been better than anticipated, as the services sector shows greater resilience and the labor market is still heated.

The median of 75 projections from financial and consulting firms indicates a 0.6% GDP growth in the third quarter compared to the second, when it climbed 1.2%. IBGE’s official data for the third quarter will be released on Thursday, as well as potential revisions to previous quarters.

In the year-over-year comparison, there may even be a slight acceleration in the GDP, to 3.6% in the third quarter from 3.2% in the second quarter, according to the median of 71 analysts.

Since the last quarter of last year, there has been an average GDP growth of 1% in quarterly comparisons, which reflects the favorable picture of the global economy driven by high commodity prices, the reopening of the Brazilian economy after the Covid-19 pandemic eased, and fiscal stimuli, such as the authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts and the early payment of the 13th salary, a year-end bonus, to retirees, said Felipe Salles, the chief economist of C6 Bank.

In his view, the scenario has already started to change in the second half of this year: the world is growing at a slower pace, the United States is raising interest rates, Europe faces energy shocks and the risk of recession, and China is undergoing a strong deceleration impacted by its “zero-Covid” policy. Commodity prices are also starting to fall, with repercussions for the Brazilian economy, said Mr. Salles.

Here in Brazil, the effect of the reopening of the economy, which benefited the services industry in the first half of the year, is beginning to lose steam, according to the economist, and a clearer effect of the tight monetary policy is expected. Mr. Salles projects a 0.4% GDP growth in the third quarter compared to the second. “These external and domestic headwinds are already affecting confidence indexes,” he said, adding that this is expected to cool down the sector.

Luis Otavio Leal — Foto: Divulgação

Still, on the supply side, activity is expected to be sustained in the third quarter by services (up 0.8% compared to the second quarter, according to the median obtained by Valor) and by agriculture (2%), the latter benefited by the good performance of the second yearly crop of corn, said Luis Otavio Leal, the chief economist of Banco Alfa.

Positive surprises in both sectors even made Santander revise its projection for third-quarter GDP to growth to 0.9% from 0.6%. “This updated forecast highlights a [new] forecast of stronger GDP, bringing a strong result of four gains in a row,” said economist Lucas Maynard.

Industry, on the other hand, probably saw a weak performance, but still positive (0.3%), driven by the transformation and utilities, said Itaú Unibanco, which also adjusted its projection for the third-quarter GDP to 0.6% from 0.4% because of services.

“There will probably be some deceleration in industrial GDP, both in the manufacturing and extractive industries. But the services part is still quite strong and resilient, especially transport services, which weigh a lot in the model,” said Danilo Passos, an economist at Wealth High Governance (WHG).

Laura Moraes, an economist at Neo Investimentos, said she does not foresee a rise that big in services, which puts Neo on the more cautious end of GDP projections, at 0.2%. “In fact, services have been surprising throughout the year, but we are not capturing all of this they see. Still, it’s a good number and I wouldn’t be surprised if the result came in higher,” said the economist.

On the demand side, growth is sustained by household consumption (0.6%) thanks to the effect of vote-getting measures put in place by the federal government – such as the increase in the cash-transfer program Auxílio Brasil to R$600 a month and a slower inflation as a result of a reduction in fuel prices. The labor market plays a role as well, as it has been recovering fast and intensely.

The Gross Fixed Capital Formation, a measure for investments in the GDP, probably increased by 1.3%, according to the median collected, “mainly due to the higher domestic absorption of capital goods, notably machinery and equipment, also related to the agricultural sector,” said Mr. Maynard, with Santander.

“We will probably see some contribution from government consumption, which was flat,” said Mr. Leal. Valor’s median indicates an increase of 0.6%.

As a result, the economists’ assessment is that domestic demand – the sum of household and government consumption, investments, and inventory changes – will be strong. Safra, which expects GDP growth of 0.4% in the third quarter compared to the second quarter, says that this growth “benefited from fiscal stimuli in the recent period, which is likely to translate into an one-percentage-point growth in domestic demand met by falling inventories and strong imports.”

The median expectation for the external sector in the third quarter is an increase of 3% in exports and 3.7% in imports.

Although Alfa is on a more optimistic end of the projections for third-quarter GDP growth, at 0.9%, Mr. Leal said that the scenario expected for the period is unlikely to differ much among consultancies and financial firms in terms of the factors that supported growth. “Maybe we are expecting a greater impact from the slowdown in inflation and the measures put in place in view of the election.”

For Mr. Passos, with WHG, who also expects a 0.9% rise for GDP in the third quarter, a weaker third quarter than the second – even if the difference is not so great by his projection – “means that the economy is losing a little momentum,” he said.

For the fourth quarter of 2022, the median expectation from the projections of 67 analysts is of a stagnant economy. “This 0% projection has the risk of being more negative, especially if credit comes in lower. We see default growing, new concessions adjusted for inflation cooling down and entering a trajectory that is consistent with monetary policy,” said Mr. Moraes, with Neo.

For Alfa, which expects a decrease of 0.5% compared to the previous three months, the period is likely to be affected by a slower labor market at the same time in which the impact of interest rates, which was somewhat hidden in the third quarter by government stimuli, will become clearer, said Mr. Leal. And investments should also feel the rise in interest rates more strongly, said Mr. Salles, with C6, who projects that fourth-quarter GDP will drop 0.3%.

There are, however, some unknowns. Among them, the effect yet to be verified of the atypical sequence of FIFA World Cup, Black Friday, and year-end holidays. “We do not know the impact of this shopping days, something that our models do not reach,” said Mr. Leal.

Mr. Passos, with WHG, says he does not see, with the information available so far, a negative GDP in the fourth quarter – he projects 0.3% growth. “Especially if the service sector comes in very well in the third quarter, which generates a positive statistical carryover,” he said.

The median projection of 83 analysts indicates GDP growth of 2.8% this year, before slowing down to 0.7% in 2023.

*By Anaïs Fernandes, Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/