Unemployment, El Niño and interest rates: what analysts observe to understand the direction of GDP

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Economic activity started to slow down, but it should still increase by 3% in the year, driven by the super harvest that boosted Agriculture in 2023. Now, the work is to understand where the risks are so that the slowdown does not become more accentuated. GDP: Agriculture could grow by 14% in 2023, according to a projection by SulAmérica Investimentos. Reproduction/Jaelson Lucas/AEN Without the effects of the super harvest that impacted the Brazilian Gross Domestic Product (GDP) in the first half of the year, the new activity result confirms analysts’ expectations of a slowdown in the economy. In this third quarter, the country’s GDP increased by just 0.1%, as announced by the Brazilian Institute of Geography and Statistics (IBGE) this Tuesday (5). Experts interviewed by g1 expected a result between a 0.5% drop and stability compared to the previous quarter. Now, attention is on the future: which factors could trigger a more intense slowdown, and which could reverse the trend and bring a better pace in 2024? Economists have had difficulty setting the results in their projections — partly because it is no longer so intuitive to know the effects of macroeconomic measures on a day-to-day basis. Some examples: The rise in interest rates has not yet caused significant effects on the job market, which helps the country to maintain consumption; With current consumption, the services sector has resisted: it has slowed down, but at a slower pace than expected; Furthermore, possible fiscal impulses in the future, such as the payment of late court orders, could inject billions into the economy — and, consequently, end up heating up demand. On the other hand, the level of interest rates is still high, and the effects could drag on and affect the coming months; At the same time, these effects of interest rates and high family debt, which had had little impact on consumption, began to show their faces more; And another point of worsening is the external scenario: a recession in the United States could reduce global investments and complications from China could affect our exports; Finally, the scenario is one of uncertainty about the effects of El Niño on the 2023/2024 harvest, and a large part of this year’s GDP comes from agricultural commodities. These doubts that permeate the minds of economists are called “balance of risks” in the jargon of professionals. Analysts interviewed by the report explain the rationale behind each of the topics. See below. High interest rates and consumption Brazil began a cycle of falling basic interest rates in August. But, for almost a year, the Selic remained at a very high level, at 13.75% per year. Higher interest rates increase the cost of credit, reducing family consumption and business investment — at least in theory. During this period, there was some consumption momentum through social benefits, while the job market heated up. In September, the last month of the third quarter, the country had an unemployment rate of 7.7%, the lowest since the quarter ended in February 2015. There was also a historic record for employed workers, with 99.8 million workers. The average real income was R$2,982 in September, an increase of 1.7% in the quarter and 4.2% in the year. Of course, the Brazilian job market is still going through a process of normalization since the destruction of vacancies during the Covid-19 pandemic, but these are numbers that contradict the logic of a country with high interest rates. The improvement in the job market helped a lot to maintain the consumption of services, the main factor in GDP. The expectation was that this sector would have suffered much more by now. Household debt also weighed less than expected in the first half of the year due to fiscal measures taken by the government. These are the cases of the real increase in the minimum wage and the adjustment for beneficiaries of the Bolsa Família program. These are measures that injected capital into lower-income families, bringing more consumption of non-durable goods, such as food. It is a situation that may not be repeated next year, as the forecast is that prices will rise without the supply effects of the 2023 super harvest. For the chief economist at MB Associados, Sérgio Vale, the credit constraints and slowdown in economy due to interest rates should show more signs in the second half of the year, which has already made economists revise downwards the GDP closing projection for this year. There was a surprise in the first half, but the second half is disappointing more than anyone imagined. The negative effect of interest on services, retail, industry is becoming clearer over time. Vale projected a drop of 0.5% this quarter and is betting on a GDP of around 2.7% at the end of the year. “The risk is that we return to a scenario from 2017 to 2019, in which commodities were not performing brilliantly and the economy was relatively weak.” But the chief economist at SulAmérica Investimentos, Natalie Victal, puts yet another issue on the radar, which could mess up the game: the payment of court orders by the federal government. The economic team has plans to pay off the amounts this year. The Minister of Planning and Budget, Simone Tebet, wants to send a Provisional Measure to the National Congress to create extraordinary credit to allow the payment of the R$95 billion stock. “It is an important amount of resources that, when they enter, have the potential to generate a temporary increase in consumption”, says the economist. Investments felt the weight On the other hand, Juliana Trece, from FGV Ibre, indicates that the interest rate action was more decisive on the business side. The higher rates, added to the uncertainty in the government’s economic agenda, have been brakes so far and are burdens for the coming quarters. The Gross Fixed Capital Formation segment, which measures investments, is falling very sharply this year. In addition to interest, the fiscal crisis and tax reform come into play, which delay business decisions. Recently, the federal government revised its primary deficit forecast to more than R$170 billion in 2023. The market’s distrust of the government dealing with its own debt makes foreign capital more agitated. Furthermore, tax reform is still open. Businesspeople prefer a little more visibility before reaching into their pockets. This aversion to risk has a direct effect on interest rates and exchange rates, and causes the minimum Selic level to be higher than expected. In short: more waiting to unlock the scenario and water in the beer for those planning long-term investments. Excellent agriculture, but not alone The common point among those who follow economic activity is that Agriculture had an exceptional performance in the first six months of the year, when the effect of this year’s super harvest entered the National Accounts. The result repositioned expectations for Brazil’s GDP in 2023, but will not be repeated in the second half of the year with the end of the harvest. Natalie Victal, from SulAmérica, projects sector growth of around 14% in 2023. But she highlights two issues: it was not isolated growth and a special performance is not the base scenario for 2024. The economist calculates that, at the end of By 2023, Brazilian GDP will grow by 2.8%. But it would have grown by 1.8% excluding Agriculture. It is brilliant growth, considering that agriculture represents a third of GDP considering the entire chain. But the performance of services and the extractive industry, especially oil, are very relevant. For next year, SulAmérica expects growth of 1.5%. For this, however, Agro GDP must be stable compared to this year. This is where the uncertainty coming from the 2023/2024 harvest comes in, amid El Niño. A crop failure of an important product or even a negative variation in flow due to a crisis in trading partners could lead to a downward revision of the numbers. “Such significant growth also means that ‘anything’ could slightly reduce agricultural results next year”, says Natalie Victal. Eye abroad Exports have also been a highlight of GDP so far. And the pace of exports helps to hold down the exchange rate and, consequently, inflation. The trade balance recorded a surplus of US$71.3 billion from January to September this year. The value represents an increase of 50% compared to the same period last year and the projection is to end the year above US$90 billion. It turns out that China, Brazil’s main trading partner, is going through a period of challenging growth. The Chinese government has set an economic growth target of around 5% for this year. But data releases throughout the year are mixed, and suggest that more stimulus will be needed to sustain the start-up. A gear failure could directly harm Brazil. In the last three years, the GDP result is closely linked to commodities, especially agricultural. Any economic data you look at highlights the Central-West during this period. In the economist’s estimates, the expectation is that Agriculture and Extractive Industry, expressions of the commodity market in GDP, will represent up to 70% of the year’s growth — and this is the extent of the dependence on partners like China. Finally, there is fear of recession in the United States. It is the type of situation that causes effects beyond the simple impact on foreign trade: a breakdown in the American economy scares investors and makes them look for safe assets. As a result, Brazil loses out as an emerging market. Investor dollars leave, bringing impacts on the exchange rate and pressure on interest rates — which need to rise to be more attractive amid the risk. The latest data, however, provides some relief: goods inflation in the United States has declined and should facilitate convergence towards the 2% target. In other words, the Federal Reserve (Fed, the American central bank) may think about reducing interest rates sooner, before a more aggressive crisis comes.

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