Brazil’s industry on ‘moderate reacceleration’ as 2023 growth prospects near 3%

SAO PAULO (ICIS)–Brazil’s economy started 2023 on the backfoot and GDP growth expectations at barely 1%, but nine months later most economists and analysts now expect growth to be around three times higher.

Even the beleaguered industrial sectors, which were lagging agriculture and services, are posting a “moderate reacceleration”, the Banco Central do Brasil (BCB) has said, according to the minutes of its last monetary policy committee (Copom) meeting.

The optimistic players within the chemicals industry, a sector hardly hit by the wider manufacturing malaise in the first half of 2023, might even be able to see some green shoots: chemicals producer prices rose 1% in August, the first increase after 18 months of consecutive falls.

THE MAGNITUDE OF THE SURPRISE
Upgrades to GDP forecasts by Brazilian institutions come after those issued by international bodies such as the International Monetary Fund (IMF) or private financial institutions such US credit rating agencies Fitch and S&P.

For much of 2023, the BCB’s tone tilted towards pessimism, and until August it kept interest rates at 13.75%, despite inflation falling for much of the year. Both the newly sworn in Brazilian government and manufacturing companies blamed high interest rates for part of the manufacturing malaise, as it kept consumers away from big-ticket purchases.

The central bank’s assessments of the economy tended to put more weight on the downside factors. With the economy about to enter Q4 on a strong footing, the BCB’s tone changed this month, saying Copom members had “held a wide-ranging debate” on the reasons for the “magnitude of the surprise” regarding stronger growth in 2023.

The debate occurred on 19-20 September, when the Copom decided to lower rates for the second time in three months by another half percentage point, with the Selic benchmark now at 12.75%. The minutes of that meeting were published this week.

The bumper harvest this year greatly contributed to healthy growth in the first quarter and, somehow, put the wheels on other sectors, which started reviving from the second quarter onward.

Brazil’s fertilizers- and export-intensive agricultural sector accounts for around 25% of the country’s output.

“Although corroborated by data, it [strong agriculture season] does not justify the entire magnitude of the surprise. Another possibility is that the expansion of disposable income, as the result of the labour market dynamics, decline of food prices, or income transfer programs, has also provided some support to consumption,” the committee said.

“Copom focused on this issue, deemed of high relevance, and stressed that the assumption of a growth sustained by the increase of income is corroborated by the resilience in the consumption of services rendered to households.”

The committee added indicators were suggesting a “scenario of stronger resilience” of the economy.

“Generally speaking, in the sectoral indicators, there is some deceleration in the trade sector, moderate reacceleration in industry, and stability in the services sector growth, after a stronger growth pace in previous quarters,” the Copom added.

The bank also said Copom had discussed whether some reforms passed by congress – where the government, which does not command a majority, must permanently agree measures with other parties – had contributed to healthier growth.

Certain mistrust about the left-leaning cabinet under Luiz Inacio Lula da Silva, which took office in January, must have also been the reason for the more than 100 economists surveyed weekly by the BCB to lag in their growth expectations.

They, too, were expecting worse growth figures and higher inflation for much of 2023 than the actual figures came to show.

Now, they are forecasting GDP to grow by 2.92% in 2023, according to this week’s survey, the so-called Relatorio de Mercado.

Only a month ago, the survey showed average growth expectations at 2.31%.

For 2024, economists expect growth at 1.50%; other forecasts, however, stand at around 2.0%.

A MORE DIFFICULT COUNTRY TO GOVERN
While the BCB praised the government’s ability to reach out in parliament to pass reforms – a move which no doubt has dispelled fears among bussineses of a hard-left administration under the so-called ‘Lula 3’ term – other observers see in that a sign of the polarised and unstable political times we are living in.

Mansueto Almeida, chief economist at Brazil’s investment bank BTG Pactual, said this week that the Brazilian multiparty system, which has made Congress a true counterpower to the executive, has also meant some reforms are harder to pass.

The country has for much of 2023 been talking about a tax reform which would simplify the multiple taxes consumers and companies must pay. There has been some progress on the negotiations, but success is not guaranteed.

“We have been 40 years talking about a tax reform. Equally, we spent 20 years debating the pensions reform, which ultimately was passed. The tax reform is important for the economy and the lack of clarity does not help,” Almeida said.

“This takes me to a wider reflection about strong governments just 20 years ago and today. In his first election victory, Lula won in 26 of Brazil’s 27 states. Last year, he won in 13 out of 27. We have a more divided and independent Congress, which can be good as counterweight to the cabinet but also means reforms, especially economic reforms, are harder to achieve.”

To add to the GDP growth upgrades race, Almeida said BTG Pactual is forecasting a rise in output of 3% in 2023, and of 2% for 2024.

“Consumers and companies are gaining confidence and should enter into 2024 with a much more positive sentiment,” he concluded.

Almeida was speaking at an event about the Brazilian economy organised by credit rating agnecy Fitch in Sao Paulo this week.

Focus article by Jonathan Lopez