1st quarter GDP shows resilience of the Brazilian economy, but scenario for 2nd half of 2022 is more challenging
Analysis points to a good result driven by services, but high interest rates and external factors will impact the coming quarters
First-quarter Gross Domestic Product (GDP) growth came below market expectations, but the 1.0% rise was a good result and improves the “statistical carry” for 2022, from 0.3% to 1.5 %, say economists and preliminary analysis of the indicator.
The performance was driven by the service sector, which represents 70% of GDP and was driven by people returning to circulate and consume even with the outbreak of the omicron variant at the beginning of the year. The retraction of agriculture was already expected, and the negative side was the sharp drop in investments.
Economists point out that the result for the second quarter should also be positive, but the economy will start to slow down from the second half of the year (and even more in 2023) due to the sharp rise in interest rates that the Central Bank has promoted to curb inflation. .
“What provided stronger dynamics in this quarter – the normalization of services and the positive shock of the external sector – at the margin will no longer bring more impetus to the economy, so from now on it should not have such vigorous growth”, says Alexandre. Schwartsman, economist, consultant and columnist for InfoMoney.
“But GDP will hardly grow by less than 1.5% due to the statistical burden – apart from an absolute disaster. The stat carry went from +0.3% to 1.5%, it’s a big change. It’s not brilliant, but it was a good result” (‘statistical carry’ occurs when the result of one quarter has a positive impact on the following ones, assuming zero rates of change over the year)”
Differences over 2nd quarter GDP
For Luca Mercadante, economist at Rio Bravo, despite the GDP result having been below market expectations, “it still represents an improvement in relation to what was expected at the beginning of the year”. He points out that government transfers boosted household consumption and, for the next quarter, credit and the job market can still sustain an advance. “But in the second half of the year, we expect high interest rates and inflation to slow down activity.”
Alex Agostini, chief economist at Austin Rating, also says that the 1.0% rise in GDP “is a number to celebrate” but sees a much tougher scenario ahead. “The economy [brasileira] not yet felt in the first quarter all the restrictive monetary policy nor all the crisis caused by the war [entre Rússia e Ucrânia]. It started at the end of February, so it took less than half the quarter.”
Agostini also highlights the rise in interest rates in the United States and the slowdown in China’s economy, due to the Covid-19 outbreaks (and the heavy lockdowns imposed by the government). “Everything will have a bigger effect in the second quarter, so there will hardly be a maintenance of positive performance. In addition, the spike in Covid-19 cases in Brazil could affect the service sector in the coming quarters. the result was very good [do primeiro trimestre]but it should not stand.”
Rodolfo Margato, an economist at XP, is more positive for the second quarter and says that “services and retail activities remained on a solid upward trajectory in April and May, according to high-frequency data we follow”, so he projects a high of 0.7% of GDP in the period. “That said, we expect a significant slowdown in domestic activity in the second half of the year, mainly due to the tightening of monetary policy.”
Margato says that the first quarter result reinforces XP’s projection, that Brazil’s GDP will grow 1.6% in 2022, but “the balance of risks for next year’s economic growth is tilted downwards”.
Services as a highlight of the 1st quarter
The service sector, which suffered the most at the beginning of the pandemic, was the highlight of the first quarter GDP. It grew 1.0%, against stability in the industry (up 0.1%) and retraction in agriculture (down 0.9%).
“The activity was stimulated by the services, with a population more confident in consuming even with the micron. Now there is a question: whether interest rates will slow this growth”, says Gustavo Cruz, economist and strategist at RB Investimentos. He says that the downturn in agribusiness is not a cause for concern, because it was caused by a crop failure, but “the industry is something more structural”. “The fall in investment should be a topic for the election, so that Brazil does not grow only with the engine of services”.
“It’s growth anchored in the service sector, which has been growing well in recent semesters and better than other sectors,” says Schwartsman. “In the service sector, activities are mostly face-to-face. The biggest growth came from other services, which include a gym, restaurant, hairdresser, manicure, school… [na pandemia] is recovering. It is the sector that employs the most in the economy and that necessarily needs to be face-to-face. They still haven’t invented a way to cut hair virtually.”
Goldman Sachs analysis points out that “the resilience of first-quarter growth is largely due to renewed stimulus from fiscal policy, a stronger-than-expected labor market, and a short-lived and milder-than-expected impact. what is expected for the wave of the Omicron at the beginning of the year in mobility and activity”.
The document also highlights that economic growth (and households) “has benefited from a reasonable amount of fiscal stimulus in recent months”, including subsidies for diesel and cooking gas, Auxílio Brasil, tax cuts and import tariffs and withdrawals from the Severance Indemnity Fund (FGTS), and that “the economy performed satisfactorily, despite the significant tightening of financial conditions and the acceleration of inflation”.
Investments as a negative highlight
The negative highlight was investments (Gross Fixed Capital Formation), which fell by 3.5%, impacted by the decrease in production and the substitution by imports of capital goods. For Carla Argenta, chief economist at CM Capital, the drop in investment “is particularly worrying”. “If the growth of domestic demand is not accompanied by productive investments, the capacity of national production to meet national demand is compromised”.
She highlights that Gross Fixed Capital Formation (GFCF) grew in just one of the last four quarters. “This continuous and undesired evolution could compromise the level of activity in the coming years. Currently, GFCF is 14% below the peak of the historical series, in September 2013, and 12% above the pre-pandemic period”.
Impact of interest rate hikes
Goldman Sachs notes that “some of the resilient growth momentum from the first quarter will carry over to the second quarter, but the second half is expected to face intense headwinds”, such as “very tight domestic financial conditions, double-digit inflation, record household debt and the noise and uncertainty generated by a polarizing election”, in addition to the end of the favorable impact of the reopening of the economy.
Schwartsman, who was director of the Central Bank, also highlights that monetary policy will start to impact the economy from the second half of the year, as interest rates turned contractionary between the third and fourth quarters of last year – and the lag is usually nine months. “Interest rates turned contractionary and continued to rise. The real interest [descontada a inflação] went from 3% in October and are now in the range of 5.5%, 6%. It has a contractionary effect that will extend throughout 2023 as well. There is still an election in the middle.”