agriculture shines, but consumption and investment stall

The strong performance of agriculture in the first months of the year may be giving a distorted image of the situation of the Brazilian economy as a whole. While rural producers reap a super harvest that inflates Gross Domestic Product (GDP) results and projections, sectors such as industry remain stagnant. Consumption and productive investment also disappointed.

Thanks to the momentum of agro, the GDP advanced 1.9% in the first quarter, above expectations. The data led to a wave of revisions in economists’ forecasts for the full year. From one week to another, the median of expectations jumped from 1.26% to 1.68%, and the most optimistic bets increased from 2.3% to 3%, according to the Central Bank bulletin Focus.

The point is that, while production in the field increased by almost 22% compared to the last quarter of 2022, other sectors are on a very different path. The industrial GDP retreated 0.1%, the second consecutive retraction. Services, in turn, grew by 0.6%.

The results from the perspective of consumption were not better. The so-called internal absorption – the sum of household consumption, productive investment and government spending – came in weaker than expected. Household consumption grew by only 0.2%, government spending increased by 0.3% and productive investment shrank by 3.4%.

Household consumption grows little, even with fiscal boost

Household consumption disappointed in the first quarter. “Given the recovery of employment, the fiscal impulses via the Bolsa Família program and the reheating of the real salary mass, the quarterly growth of consumption was disappointing”, points out the chief economist of the Fibra bank, Marco Maciel.

One factor that exerts negative pressure is default, which has risen relentlessly since the beginning of the year, according to Serasa Experian’s calculations. In April, 71.4 million people had credit restrictions, or 43.8% of the Brazilian adult population. It is the highest number in the historical series started in March 2016.

Debts with banks and finance companies are on the rise. According to Serasa, they accounted for 46.7% of the total in April, compared to 40.5% a year earlier.

Families also have more financial commitments. Research carried out by the National Confederation of Commerce in Goods, Services and Tourism (CNC) points out that, in April, 78.3% of families had outstanding debts (post-dated checks, credit cards, overdrafts, store payroll, personal loan and/or car and house installment).

The entity’s expectation is that the situation will worsen in the coming months. “The risk of default has increased in the middle class”, says economist Izis Ferreira. She points out that those who have overdue debts for a longer time continue to face difficulties in getting out of default due to high interest rates, which increase financial expenses.

Investment retracts and hampers future GDP growth

Investment fell by 3.4% in the first quarter, the worst start to the year since 2009 for the indicator. According to Inter bank’s chief economist, Rafaela Vitória, the retraction, as well as that of household consumption, was influenced by more restrictive interest rates.

Maciel, from Fibra, makes a link between the sharp declines in investment and imports, which fell by 7.1%: the use of foreign components in machinery and equipment produced in Brazil is very high, which means that part of the sharp drop of imports is associated with shrinkage in productive investment.

Another factor that weighs on investment retraction is the financial situation of companies. According to XP economists, Alexandre Maluf and Rodolfo Margato, they are more indebted. Their financial situation has also deteriorated over the past year.

A study by TC Economática based on the performance of 312 Brazilian companies points out that nominal net operating revenue (not including inflation) grew by 4.51% in the comparison between the first quarters of 2022 and 2023. operating result or cash generation, measured by Ebitda, fell by 4.19%.

Net profit fell even further: 37%. And 31% of companies closed the first quarter in the red, with a loss.

The investment pullback raises concerns among economists, as it is an essential element in driving sustainable economic growth.

The investment rate fell from the equivalent of 18.9% of GDP in the last quarter of 2022 to 17.7% in the first three months of this year. It is the lowest index of the last nine quarters.

This retraction, according to Inter’s chief economist, reflects the cooling of sectors linked to commodities, as well as the impact of interest rates on construction.

First numbers for the second quarter show a worsening situation

The first numbers for the second quarter show that this behavior continues. The physical production of capital goods fell 8.3% in the first four months of 2023, compared to the previous year.

“These numbers reflect the tightening of monetary policy, the lower profitability of companies and the pronounced drop in truck production”, says Rodolfo Margato, economist at XP Investimentos.

But it is not just capital goods that are being affected by the adverse scenario. The situation is also repeated among durable consumer goods. Despite still registering a growth of 5.8% in the comparison between the first four months of 2022 and 2023, the trajectory is downward.

In April, physical production shrank by 6.9% compared to March and by 2.6% on a quarterly basis. “More expensive credit and a high degree of indebtedness have been impacting this activity”, says Margato.

GDP projections for the coming quarters

Projections are for a slowdown in GDP growth in the coming quarters. Economists Natália Cotarelli and Matheus Fuck, from Itaú, see a loss of momentum in the coming quarters, with slightly positive growth in the economy.

“The retraction of domestic absorption in the first quarter reinforces this view. After all, the strong GDP growth in the first quarter was, to a large extent, driven by sectors less sensitive to the economic cycle”, add XP economists, referring to agriculture and mining and quarrying, which grew 2.3% at the beginning of the year .

For Maciel, from Banco Fibra, the expectation is that the good results of the harvest will be reflected until July, contributing to maintain robust GDP in the second quarter and to the deceleration of inflation on food at home.

Investments should continue at a weak pace, due to the maintenance of interest rates at high levels. For consumption, expectations are of fragile growth. “Personal expenses with goods and services should continue to cool down in the coming months”, say economists at XP Investimentos.

On the one hand, there is a more resilient labor market and real income benefiting from the drop in inflation. On the other hand, there is the pressure caused by interest rates and the deteriorating conditions of domestic budgets.

Vitória points out that the drop in inflation and the expected start of the cycle of cuts in the basic interest rate (Selic) in the second half may result in a recovery of growth from the end of the year.

“But we should still see low growth until 2024”, says the economist. In the opposite direction to the perspectives for 2023, the median projections for the 2024 GDP dropped from 1.4%, a month ago, to 1.28% in the most recent Focus bulletin.