In addition to the GDP surprise in the 1st quarter – 03/06/2023 – Ana Paula Vescovi

The GDP result for the first quarter brought a strong positive surprise to the markets. Despite being under tight financial conditions for almost a year, the expansion was 1.9% compared to the previous quarter, after seasonal adjustment. The spectacular performance of agriculture helped us to row against the tide, with the sector’s production registering an increase of 21.6% in the quarter (or 18.8% in relation to the same quarter of last year).

To get an idea of ​​the “intensity” of this GDP, compared to the first quarter of 2022, still affected by the lower post-pandemic mobility, the increase is more expressive: 4%. And, if nothing grew sequentially until the end of the year, this result would already guarantee a GDP of 2.4%, which we call statistical loading. It will certainly be a number to highlight in the international comparison.

The result was quite counterintuitive for those who feel the tightening of interest rates in their budgets, the rise in defaults both in families and in companies and the still high level of uncertainties, which create obstacles to a more lasting cycle of investments.

Helped by the climate, technology and entrepreneurship in the countryside, the agro has done well. According to the April LSPA (Systematic Survey of Agricultural Production), the soybean harvest should grow 25% compared to last year. In total, the grain harvest should grow 15%, if a corn harvest with a 9% increase is confirmed.

Agricultural income should have another strong year and reach around R$ 1 trillion, not due to the increase in commodity prices or the depreciation of the real —as has been the case in recent years— but rather due to the expressive record in volumes produced. It is worth noting that the volume of federal funds allocated to the 22/23 Crop Plan was one of the smallest in historical perspective, with the budget of BRL 12.4 billion in subsidies almost entirely committed in less than five months.

For the time being, grain production has not activated exports at the same intensity. Soybean exports fell 10% compared to the first quarter of last year, largely due to lower international prices and a weaker dollar, a combination that adversely affects producer revenue. Soybean exporters have accumulated inventories in anticipation of better prices ahead, a strategy that is short-lived, as warehouses will need to be released to receive the corn crop.

In total, commodities accounted for 68% of exports in the period. Oil and iron ore sales also helped. The stronger flow of foreign exchange contributed to the appreciation of the real and the disinflation of food products, which helps sustain the purchasing power of lower-income consumers.

However, apart from agribusiness, the more cyclical activities, especially those more dependent on credit and confidence, continue to slow down, something that has occurred since the middle of last year. Investments fell 3.4% at the margin. Household consumption grew by just 0.2%, with some support given by the increase in fiscal stimuli (around 1% of GDP, mainly focused on raising the Bolsa Família) and by the still heated job market. Real wages grew by 9.6%(!) in April compared to last year, and with the number of people looking for work running at historically low levels since the pandemic.

The more robust GDP, unfortunately, should not be repeated in the remainder of the year. Economic activity tends to lose strength in a context of global slowdown and in response to the tightening of financial conditions since last year. Furthermore, agribusiness production will have less impact in the other quarters, the stored crop will be exported, and household consumption will be more dependent on income and credit. And the lagged effects of monetary policy are yet to slow down the labor market.

As important as celebrating the good one-off result is understanding that we are experiencing a contractionary economic cycle on a global basis, which aims to quell an inflationary surge. And that, we hope, will fulfill its role.

Even more important than understanding the temporary effects of the current economic cycle would be to remain focused on leveraging our comparative advantages to build inclusive institutions and thereby raise the growth potential and make Brazil a developed nation.

Commodity production, for example, has stood out for at least the last three decades for its productivity gains (in agriculture, around 3% per year). So far, this impressive contribution has not been enough to raise average productivity per worker in Brazil, practically stagnant.

Much has been said about the effect of recent reforms on raising potential GDP, but the recurrence of shocks since then, the excess of injected stimuli, their reflection on commodity prices and the increase in macroeconomic risks have not yet allowed us to attest to the proof of this hypothesis.

More than betting on sectors, it is necessary to focus on the causes of low growth and attack them. Currently, we are a rare case in the world, with comparative advantages in fundamental matters, such as the environment, climate and energy. In other words, it is necessary to ensure equal opportunities, political representation and Judiciary that adhere to collective interests, fiscal sustainability, lower transaction costs for those who produce and invest, and innovation, among many other well-known guidelines.

It is worth thinking, beyond these points of attention, what else should we do now, and that we haven’t done yet, to overcome the middle-income trap in which we are trapped.

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