GDP growth should be lower in 2024, economists point out

On the one hand, foot on the brakes, with the high Selic rate – currently at 11.75% per year. On the other, foot on the accelerator, with more government spending. The lack of consensus on economic policy could take a heavy toll in the future, with interest rates being kept high for longer to try to contain inflation.

But, in the short term, economists’ expectations are for lower GDP growth in 2024. After three consecutive years with GDP expansion close to or greater than 3%, the effects of the Selic rate should be felt more strongly.

The median expectations for GDP expansion in 2024 was 1.51% on Tuesday (26). “There is no reason for stronger growth”, says the coordinator of national accounts at FGV’s Brazilian Institute of Economics (FGV Ibre), Claudio Considera.

In addition to Selic, other factors tend to contribute to this scenario, highlight analysts interviewed by People’s Gazette:

• Lower contribution from agriculture, as there will be a drop in the 2023/24 harvest;
• Cooling down in global economic activity, with the maintenance of high interest rates in the main economies;
• Lower fiscal impulse, despite the maintenance of the expansionist bias in public spending;
• Exhaustion of the income transfer impulse.

Economic activity is already showing signs of slowing down

Economic activity is already showing signs of slowing down. One of the thermometers is the Fundação Getulio Vargas (FGV) GDP Monitor, which shows that accumulated growth in the 12 months up to October was 2.9%. At the end of the first quarter, the annualized expansion of the economy was 3.6%.

Another is the Central Bank Economic Activity Index (IBC-BR). In the 12 months ended in October, the indicator closed with a change of 2.19%. The index ended 2022 with an increase of 2.9%.

Services continue to drive growth across sectors

One sector in which the slowdown should be more evident is services, the main engine of Brazilian GDP. The annualized growth rate went from 8.3%, in December 2022, to 3.6%, in October.

Even so, the expectation of the National Confederation of Commerce of Goods, Services and Tourism (CNC) is that in 2024 the activity will expand by 2.7%. “Even with this loss of pace, services will have comfortable growth”, says the senior economist at Julius Baer Brasil bank, Gabriel Fongaro. Two factors will counterbalance each other and influence the sector’s performance: on the positive side, the government’s spending policy, which will be on the accelerator; on the negative side, interest rates will remain at levels considered restrictive by the market.

Business confidence in the sector, however, is low. A survey by FGV Ibre shows that it is at its lowest level since March 2023. Economist Stefano Pacini says that the cycle of falling interest rates and the reduction in household debt do not seem to be enough to guarantee resilience in 2024.

A agriculturewhich was the highlight of 2023, with sectoral GDP growth of 18.1% in the first three quarters compared to the same period of the previous year, should have a more timid performance in 2024. “Agriculture will not deliver a good result in 2024”, comments the chief economist at MB Associados, Sergio Vale.

The National Supply Company (Conab) estimates a harvest of 312.3 million tons, 2.4% lower than the exceptional results of the 2022/23 cycle.

The National Confederation of Agriculture and Livestock of Brazil (CNA) expects GDP growth to continue “within the gate”, but at more modest rates. The median of the Focus Report projections indicated, on the 22nd, stability in relation to this year. At the end of November, the expectation was for growth of 1.3%.

Other challenges in addition to domestic and external uncertainties, which could make the year more complex, are climate issues, such as “El Niño” – the phenomenon that results in the warming of the waters of the Central Pacific – and the expected prices for the next cycle.

The climate issue is expected to affect production in Mato Grosso, the state that is the largest producer of soybeans and one of the largest green belts in the country, causing losses of 20% in the state, according to Itaú BBA. There was a forecast of good rains this month that did not materialize; what happened was a new heat wave.

The National Confederation of Industry (CNI) expects sectoral GDP to grow by 0.9% next year. Performance by segment, however, will not be homogeneous.

The largest contributions will come from the extractive industry, benefiting from oil exports, and industrial public utility services (such as water, energy and sanitation). The projection is for an expansion of 2% in these segments. For the construction sector, an increase of 0.7% in GDP is expected.

Projections for the manufacturing industry are lower: 0.3%. “It has been experiencing a period of stagnation for years, caused by structural problems”, highlights Fongaro.

Government spending increases with household consumption

On the activity side, the public administration consumption expenditure, also known as government spending. The market consensus, measured by the Focus bulletin, indicates an expansion of 1.5%, very close to that projected for GDP.

At least two factors favor this scenario of more public spending, point out experts interviewed by People’s Gazette: a more lenient stance by President Lula’s (PT) government in relation to the fiscal situation and the municipal elections, scheduled for October.

A problem related to the fiscal situation, according to Alessandra Ribeiro, partner at Tendências Consultoria, is collection. Despite the efforts made by the Minister of Finance, Fernando Haddad, there are no guarantees of more vigorous growth. New measures were announced on the 28th, such as the reinstatement of payroll. The slower growth of the economy also weighs heavily, which makes more robust revenue collection difficult.

O household consumptionone of the most relevant variables for the formation of GDP and which makes up approximately 65% ​​of it, should continue to grow, but at a slower pace.

Rodolfo Margato, from XP Investimentos, says that the job market remains the main supporting factor, but job creation and rising wages tend to lose strength. On the contrary, the main credit market indicators should gradually improve.

An important contribution to GDP will come from external sector, given the possibility of another strong harvest (although smaller compared to last year) and foreign oil sales. The assessment is that the impacts will be smaller than those seen in 2023.

The Brazilian Foreign Trade Association (AEB) projects that exports will fall by 0.6% compared to 2023, reaching US$334.5 billion. The result is influenced by the slightly smaller harvest. Imports are expected to grow 0.6%, reaching US$ 241.8 billion.

The entity sees a favorable scenario for the coming years, given the approval of structural reforms such as taxation. “It opens up perspectives for creating conditions to achieve positive impacts in reducing the Brazil Cost and generating greater competitiveness in exports, especially manufactured products”, he highlights.

O investment, which has fallen in the last four quarters compared to the previous three months, is a source of concern as it is the engine of future growth. “The reduction in the Selic will stop the fall, but a firmer recovery is not expected”, says the economist at Julius Baer Brasil.

The elections can provide a “little help”, says Considera, from FGV Ibre. “There is rarely no growth in election years, but the impacts are quite limited.”

Even given the prospects for continued reduction in the Selic rate, there is not much hope for an investment reaction. The Brazilian rate was 16.6% of GDP in the third quarter, while in other emerging countries it exceeds 20%. The global average, according to the World Bank, is 26.2%.

“There is no magic solution”, says the chief economist at MB Associados, Sergio Vale. For him, among the obstacles to growth are the “closed and extremely regulated economy” and “legal rigidity”.

Considers complements the reasoning by saying that more clarity is needed regarding the future. “The entrepreneur looks at a horizon of 10, 20 years and is not sure of the net return on his capital.”