Brazil: GDP surprises with an extraordinary boost from agribusiness, but domestic demand is weak – analysis

By Sergio Lamucci

The result of the first quarter GDP showed strong growth, well above the analysts’ projections, with a very expressive rise, very concentrated in agriculture and cattle-raising.

In the first three months of the year, the Brazilian economy grew 1.9% concerning the previous quarter, seasonally adjusted, which means an annualized rate of almost 8%.

The agriculture and cattle-raising sector advanced 21.6%, after four consecutive quarters of decline in this comparison basis.

The consensus of analysts heard by Valor Data pointed to an expansion of 1.3% for the GDP and 10.3% for agriculture and cattle-raising.

On the supply side, services increased by 0.6%, while industry was almost stable, down 0.1%.

On the demand side, the result showed a strong fall in investment, with a 3.4% drop concerning the previous quarter.

Household consumption grew by only 0.2%, below the 0.4% of the previous three months.

As noted by Luciano Sobral, chief economist at Neo Investimentos, domestic demand had a weak performance.

The external sector boosted the GDP on the demand side since exports performed better than imports, and the variation in stocks, in a movement related to agriculture and cattle-raising.

The first quarter numbers should lead to revisions in the estimates for growth in 2023.

Sobral, for example, which worked with a GDP expansion of 1.4% this year, should raise its projection to 1.7% or more. However, it says that agriculture and livestock tend to give back in the second quarter part of the extraordinary performance registered in the first.

Capital Economics raised its forecast from 1% to 2.3%, while Goldman Sachs revised it from 1.75% to 2.6%.

The statistical legacy that the first quarter leaves for the year is 2.4% notes Sobral.

If the GDP ends the year at the same level as January through March, with nothing else growing, the Brazilian economy will advance by 2.4% in 2023.

For the market consensus number of the Focus Bulletin of the Central Bank (BC) of 1.26% to be reached, a strong recession will be needed for the rest of the year, says Sobral – the GDP would have to fall by 0.75% in each of the three remaining quarters in comparison with the previous three months, he calculates.

On the supply side, the industry fell by 0.1%.

The manufacturing industry retreated 0.6%, the third consecutive retreat concerning the previous quarter, while construction fell 0.8%.

The 2.3% rise in mining and the 1.7% rise in electricity and gas, water, sewage, and waste management prevented a stronger fall in the sector.

On the other hand, Services rose 0.6% and had their performance boosted by the transport, storage, and mail and financial activities sectors – both up 1.2% in comparison with the previous three months.

Trade grew by 0.3%.

On the demand side, the GDP result brought less favorable news.

The most negative was the 3.4% drop in investment, the second consecutive quarterly drop.

Household consumption also performed poorly – it advanced 0.2%, slowing down for the third quarter in a row, despite the strength of the labor market and the significant volume of income transfers from the government via Bolsa Família.

Government consumption, on the other hand, grew by 0.3%.

According to the research director for Latin America at Goldman Sachs, Alberto Ramos, the so-called final domestic demand fell by 0.5% in the first quarter – the indicator comprises investment, household consumption, and government consumption, excluding changes in inventories.

The variation in inventories, by the way, had a significant contribution to the GDP on the demand side.

In Ramos’ calculations, the indicator contributed 1.2 percentage points to the 1.9% growth.

According to the IBGE, the movement is related to the formation of stocks in agriculture and cattle-raising.

According to Ramos, the foreign sector also had a significant positive contribution, also 1.2 points.

In the first quarter, exports fell 0.4%, but imports had a much worse performance, shrinking 7.1%.

The Goldman Sachs economist estimates that domestic final demand took 0.5 points off growth.

In this scenario, the outlook is for a series of increases in projections for growth this year to 2% or more.

Even with the deceleration expected for the following quarters, the statistical legacy of the first quarter alone should guarantee a stronger result for the GDP in 2023.

Economic activity has been surprising this year, driven by the exceptional performance of agriculture and cattle-raising.

The labor market’s strength and government income transfers also help, even though household consumption has advanced little.

On the other hand, high interest rates are holding back activity in an attempt by the Central Bank (BC) to bring down inflation.

The note of concern is investment, which needs to increase if the country is to advance at higher rates sustainably.

The investment rate stood at 17.7% of GDP in the first quarter, below 18.4% in the first quarter of 2022.

With information from Valor

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