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Economy records sharpest contraction since Q2 2021 in Q4 2022

The Brazilian economy ended 2022 on a sour note. The cumulative 1,175 basis points in Central Bank hikes from March 2021 to August 2022 succeeded in cooling the economy: GDP contracted 0.2% on a seasonally adjusted quarter-on-quarter basis in the final quarter of the year, contrasting the 0.3% expansion tallied in the third quarter. Q4’s reading marked the worst result since Q2 2021 and was largely priced in by markets.

The quarterly downturn was broad-based, with private and public spending, fixed investment and exports all weakening. Domestically, fixed investment contracted 1.1% in Q4 (Q3: +2.6% s.a. qoq). Meanwhile, private consumption growth waned to 0.3% in Q4 (Q3: +1.0% s.a. qoq). A lower unemployment rate in the period (Q4: 8.1%; Q3: 8.9%), together with moderating price pressures in Q4, likely prevented a larger spending deceleration. Additionally, public consumption growth moderated to 0.3% in Q4 (Q3: +1.2% s.a. qoq).

Turning to the external sector, exports of goods and services increased 3.5% on a seasonally adjusted quarterly basis in the fourth quarter, which was below the third quarter’s 3.7% expansion. Meanwhile, imports of goods and services contracted 1.9% in Q4 (Q3: +5.5% s.a. qoq). Consequently, the external sector contributed 0.8 percentage points to overall growth, an improvement from the prior quarter’s neither contribution nor detraction.

On an annual basis, economic growth cooled to 1.9% in Q4 from the previous quarter’s 3.6% expansion. Q4’s reading marked the slowest growth since Q1 2021 and surprised markets on the downside; a 2.2% expansion had been expected. The figure brought overall annual growth for 2022 to 2.9%, nearly halving from 2021’s 5.0% post-pandemic rebound.

Reflecting on the growth outlook for 2023, analysts at the EIU said:

“We recognise upside and downside risks. Higher social spending, debt relief for poor households and an 8.9% minimum-wage rise will put a floor under private consumption and overall GDP growth amid still-high interest rates, elevated inflation and a softening labour market. Nevertheless, there is a risk that these stimulatory factors delay the start of monetary easing until later in the year, weighing on investment.”