Reopening – after the end of social distancing measures put in place to fight Covid-19 – boosted activity

09/01/2022

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GDP climbed 1.2% compared with the first quarter, seasonally adjusted — Foto: Dado Galdieri/Bloomberg

The Brazilian economy grew strongly in the second quarter, with a substantial increase in household consumption and investment, on the demand side, and in services and industry, on the supply side. GDP climbed 1.2% compared with the first quarter, seasonally adjusted, slightly above the expansion of 1.1% seen in the first three months of the year.

The effect of the reopening of the economy, after the end of social distancing measures put in place to fight the effects of Covid-19, boosted the activity, as well as government measures, such as the authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts and the early payment of the 13th salary, a mandatory year-end bonus, for retirees and pensioners.

The labor market has also shown more strength than projected. The consensus of analysts heard by Valor for the April-June period was a GDP expansion of 0.9%.

After the strong first half, the economy is expected to lose steam in the second half of the year and especially next year. In the second half of the year, however, the package of vote-getting stimuli put in place in an attempt to burnish President Jair Bolsonaro’s image will still boost the economy, especially the increase in cash transfers through the social program Auxílio Brasil to R$600 from R$400.

The picture for activity seems to be more complicated in 2023. The impact of the cycle of high interest rates, which took Brazil’s key interest rate Selic to 14% a year from 2%, should slow down the economy. The scenario includes indebted consumers, stimulus measures losing effect, and more expensive credit. Besides this, the uncertainty about public accounts is likely to take its toll.

In the second quarter, household consumption advanced 2.6% compared with the previous quarter, while investment rose 4.8%. Together, they account for almost 80% of the GDP on the demand side. Government consumption, on the other hand, fell 0.9%.

According to economist Alberto Ramos, head of Latin America economic research at Goldman Sachs, the so-called domestic final demand grew 2.5%. The indicator combines household consumption, government consumption and investment, excluding changes in inventories.

The external sector, on the other hand, weighed on the GDP in the second quarter, because imports grew 7.6%, while exports fell 2.5%. Foreign purchases advanced in a period marked by a strong increase in consumption and investment. Mr. Ramos reckons that the external sector “took away” 1.34 percentage points from the GDP expansion from April to June. The domestic final demand contributed positively with 2.6 percentage points.

On the supply side, the main highlight of the second quarter was industry, with a broad-based increase of 2.2% in relation to the first quarter. Construction rose 2.7%, the extractive industry grew 2.2%, and the manufacturing industry climbed 1.7%. The power, water, gas, and sewage sectors rose 3.1%.

The services segment, which accounts for 70% of the GDP on the supply side, grew 1.3%, with a strong performance in transportation and storage and other service activities, up 3% and 3.3%, respectively. The latter includes in-person services battered by the pandemic, such as restaurants and hotels, said Rebeca Palis, the coordinator of IBGE’s national accounts. Commerce also did well, up 1.7%, while the information and communication segment grew 2.9%.

Agriculture, on the other hand, saw a slightly more modest growth of 0.5% compared with the first quarter.

After the good GDP figures, economists revising growth projections for the year. Mr. Ramos, with Goldman Sachs, raised his estimate to 2.9% from 2.2%. In 2023, he expects nearly 1% growth. Mr. Ramos wrote that the second quarter left a carryover effect of 2.6% for the year. This means that if the GDP does not grow at all from the level seen in the April-June period, the economy will expand by 2.6% in 2022. Capital Economics increased its forecast for this year to 2.5% from 2% and projects 0.8% growth next year.

After the strong result in the first half of the year, activity tends to be weaker in the second half. The labor market, however, has performed well, with lower unemployment thanks to a substantial job generation, although the figures for the July quarter have indicated a slowdown.

Furthermore, the government’s measures to boost Mr. Bolsonaro’s popularity should have an effect on activity. The package includes higher cash handouts through Auxílio Brasil, vouchers for truck and taxi drivers, and an increase in the cooking gas voucher, totaling R$41.5 billion. Inflation is falling, but this movement is concentrated on fuels and electric energy. Food and service prices are still rising considerably.

A strongest economic slowdown is likely to come in 2023, as substantial interest rate hikes put in place by the Central Bank will hit activity harder. Besides this, fiscal uncertainties could hold back investment.

In 2022, however, GDP so far shows more strength than was expected at the turn of the year. The reopening of the economy had a significant impact on the services sector, and the arsenal of government measures to stimulate activity had a clear effect.

*By Sergio Lamucci — São Paulo

Source: Valor International

https://valorinternational.globo.com/