Brazil: Economy exits technical recession with mild expansion in Q4
The economy expanded 0.5% on a seasonally-adjusted quarter-on-quarter basis in the fourth quarter (Q3: -0.1% s.a. qoq), thus rebounding from two consecutive quarters of contraction and exiting a technical recession. On an annual basis, economic growth moderated to 1.6% in Q4, following the previous quarter’s 4.0% expansion. As such, growth for 2021 as a whole came in at 4.6%, markedly contrasting the pandemic-induced 3.9% contraction recorded in 2020.
Domestically, fixed investment bounced back in quarterly terms, growing 0.4% in Q4 and contrasting the 0.6% contraction recorded in the previous quarter. Meanwhile, private consumption increased 0.7% in sequential terms in the final quarter, on solid spending on services, although this was below the third quarter’s 1.0% expansion, while government spending grew at the slowest pace since Q3 2021, expanding 0.8% (Q3: +1.1% s.a. qoq).
On the external front, exports of goods and services contracted at a more moderate rate of 2.4% in Q4 (Q3: -9.8% s.a. qoq). In addition, imports of goods and services bounced back, growing 0.5% in Q4 (Q3: -5.1% s.a. qoq), marking the best reading since Q1 2021.
The outlook for 2022 appears increasingly bleak for the Brazilian economy. While the LatinFocus panel currently sees very mild growth in the year, a number of our analysts pencil in a slight contraction overall. This comes despite soaring commodity prices as a result of the war in Ukraine feeding into improved terms of trade for key net agricultural and metal exports. However, surging inflation—particularly in energy and food prices—is feeding into the wider economy through two main channels. The first is by inhibiting consumer spending as households scale back spending in the face of escalating utility bills. The second is the rapid monetary policy tightening cycle initiated by the Central Bank in the first quarter of 2021 in response to rising consumer prices. Interest rates have risen 875 basis points since then, tightening domestic financial conditions and shackling fixed investment in turn. All the while, the October 2022 elections loom large on the economic horizon, with heightened political noise and associated policy uncertainty likely to only weigh further on activity in the run up to the crucial vote.
On the outlook for the Brazilian economy, Cassiana Fernandez, Cristiano Souza and Vinicius Moreira, economists at JPMorgan, noted:
“While higher commodity prices raise the terms of trade, supporting economic growth, the shock reduces disposable income, triggers higher interest rates, reduces global growth—particularly in Brazil’s second-largest trading partner, Europe—and might generate supply issues due to constraints on Brazil’s imports of fertilizers from Russia. We then see the crisis as net negative for Brazil’s growth and now forecast a deeper recession in Q2 and Q3 of this year. But, since [the] Q4 GDP print was much stronger than expected, the carryover for this year is higher and we revise up our 2022 GDP growth forecast from -0.4% to -0.1%.”
Solange Srour and Lucas Vilela, economists at Credit Suisse, are similarly pessimistic:
“We maintain our GDP growth forecast at -0.5% in 2022 and 2.1% in 2023: While recognizing the fluidity of the situation, we believe that the current state of events should pose only a mild impact on growth, and as a result, we maintain our GDP growth forecasts for this year and next. Revisions to our forecasts could occur in certain scenarios such as (1) the conflict escalating, (2) domestic monetary policy tightening more due to higher inflation, and (3) the domestic fiscal framework weakening in order to minimize the effects of higher prices.”