GDP: drop in investments in 2023 is Haddad’s concern — and economists’ too

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Gross Fixed Capital Formation fell 3% last year. Experts interviewed by g1 point out that an economy that grows on the demand side needs to have the necessary gain in productive capacity to avoid suffering pressure on inflation. Looking at inflation and the job market, we have good room for growth this year’, says Haddad The Minister of Finance, Fernando Haddad, celebrated the results of the Gross Domestic Product (GDP) of 2023. The first year of his administration saw economic activity grow 2.9%, more than any projection at the beginning of the mandate. At a press conference, the minister made a point of highlighting that even the ministry’s optimism, which expected 2%, was surpassed by the result. In the first Focus bulletin of 2023, financial market analysts predicted an increase of 0.80%. “Many people imagined that, due to the very restrictive monetary policy, GDP in the 2nd half of last year would fall. There was a lot of betting that there would be a slowdown to the point where we would have a small contraction in the economy,” he said. “The economy has slowed down. Interest rate, as you can see, remains one of the highest in the world. GDP slowed down, but not enough to take us out of the 3% range,” stated Haddad. The minister’s optimism is just not complete enough to give rise to concern: Gross Fixed Capital Formation (GFCF) fell by 3%. G1 has a habit of calling GFCF “investments”. In short, because it represents the flow of money for the acquisition or replacement of capital goods, with the aim of increasing the productive capacity of the business. Haddad is right to be concerned, as it is investment that promotes the development of productivity in the economy, and allows it to grow without putting pressure on inflation. “One good thing that happened in the fourth quarter is that there was a slight improvement in gross capital formation and this is quite important because we need investment to make the economy run”, said the minister. It’s good to be worried Analysts interviewed by g1 agree with the minister: the drop in investments is worrying. In addition to the 3% decline in the full indicator, the machinery and equipment segment fell 9.4% and construction fell 0.2% in the year. The investment rate was just 16.5% of GDP, the worst result since 2019 and insufficient even to replace the depreciation of the country’s productive park. In the chained series, they are 18.4% below the historical peak in 2013. Evolution of GDP year by year Art g1 Haddad’s encouragement came in the last quarter, in which there was a reversal of the three periods of decline that had accumulated in the year. Subsequently, quarter by quarter, GFCF recorded -3%, -0.2% and -2.2%, to finally rise 0.9%. Economist Juliana Trece, from the Brazilian Institute of Economics at Fundação Getulio Vargas (FGV Ibre), recalls that for years GDP has been growing through consumption, while investment has lagged behind. Without gaining productive capacity, demand reaches a point of pressure on inflation. “In 2023, there was a real increase in the minimum wage and the job market is relatively strong. Last year, many adjustments came above inflation. All of this stimulates consumption, while supply does not increase”, says the economist. Another important issue is the creation of better jobs. The investment has the potential to increase vacancies in more qualified sectors, which pay more and usually have more satisfactory productivity results. These are gains at the income end and in the Brazilian production chain itself. “Investment brings greater formalization of the economy. Although we reduced the unemployment rate significantly last year, the composition is still not the best. There are also records for informality”, says Juliana. Despite being a chronic problem in the Brazilian economy, the economist reinforces the importance of the government diligently seeking to improve the “Brazil cost” for investors. The jargon lists characteristics that make it difficult, bureaucratic or risky to put money into business here. Unemployment falls to 7.4% in the quarter ending in December Míriam Leitão sees a favorable result for the 2023 GDP: ‘Good news and points of concern’ Government’s impulse Juliana cites the tax reform as a great success of the government, which produces confidence so that businesspeople can make future plans with more security. Infrastructure plans also come into the equation, such as the new Growth Acceleration Program (PAC) and Nova Indústria Brasil, which can help trigger new projects. “It is important to have movement on the part of the government, but with due care because the space in public accounts is very restricted. We also cannot repeat programs that distorted the business environment, such as loans to ‘national champions’”, says the economist. In her speech this Friday, Haddad highlighted that one of her missions this year is, precisely, to create a better business environment to attract private investment. Interest rates at very high levels were responsible for making businesspeople hold back on investments and stop renewing infrastructure, promoting expansions and hiring. By 2024, Haddad believes that the issue will no longer have as much impact, but the country needs to be ready to take advantage of the moment. “We want to create a necessary business environment for entrepreneurs to invest heavily, because this investment is what really improves economic conditions. With investment, you grow without inflationary risk”, said the minister. “We are going to combine the domestic efforts that were made in a year and a half to tidy up the house here, which was completely disorganized, and the good winds that should begin to blow from the international economy — especially with regard to monetary policy, which should begin to loosen up sometime around the middle of the year.” Only with the exercise of futurology would it be possible to know if it is enough. But economist Chico Pessoa, from LCA Consultores, has studied the history of investments in Brazil over the last 20 years, and points out problems that are already known. “These are the classic problems: a very high interest rate and an exhaustion of the public sector’s capacity to carry out works due to fiscal restrictions, whether due to restrictions under the Fiscal Responsibility Law or a very large increase in current expenses”, he says “ In other words, investment is difficult to grow in Brazil because it is expensive and the government no longer has the money for it. And public investment is important in several countries, it is not a question of wanting to ‘nationalize’ more”. The economist recalls that, despite the decline in interest rates, the country went through a long period of real rates (those that take into account inflation during the period) above the standard. This prolonged time meant that the replacement of machines was delayed and part of the production park lost competitiveness. In other words, the low investment since the recession of 2015 and 2016 has already added up to more than eight years of impaired profitability for the entrepreneur. If there is no government income to stimulate, there is also no money left to make investment decisions. “You start to see an investment recovery in 2024 because the businessman starts to envision a future with lower interest rates and because he has already postponed the recovery of the machine while he can. But it’s difficult to move forward,” he says. “In our base scenario, there is a recovery, a growth in capital goods, but it is not enough to compensate for this year’s loss.”

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