Dec 11 / Victor Arduin

Macroeconomics Weekly Report - 2023 12 11

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"Brazil's gross domestic product (GDP) growth rate in the third quarter of 2023 was 0.1%, bringing the year-to-date figure to 3.2%. Market expects this trend to be maintained (ou to linger) until the end of 2023."

Brazil's economy surprises, but investment rate is falling

  • The Brazilian economy had a very positive 2023, with upward revisions to its growth projections many times throughout the year.
  • Once inflation fell to more comfortable levels, Brazil's Central Bank began to cut its interest rates, which benefited risk assets and created a more favorable environment for GDP expansion.
  • However, some worrying signs need to be taken into account. Investment rates and gross savings are falling in the country, a sign that the country's productive capacity may face more challenges in the long-term as it depends on capital for expansion.

Introduction

Brazil's gross domestic product (GDP) growth rate in the third quarter of 2023 was 0.1%, bringing the year-to-date figure to 3.2%. Market expects this trend to be maintained (ou to linger) until the end of 2023. In this context, risk assets, reflected by the Ibovespa Index, have accumulated gains in recent months, and the dollar has remained stable, below R$5.00.

However, other data is worrying and should be considered carefully. The country's investment rate is falling, as is gross savings formation. This tends to reduce long-term growth potential. In addition, the country's fiscal balance looks like it will take longer to be achieved, which could put pressure on inflation at some point, increasing uncertainty and creating an environment for higher interest rates.

Image 1: Accumulated Inflation 12 Months (%)

Source: IBGE

Image 2: Ibovespa Index

Source: Refinitiv

A less restrictive interest rate environment boosts risk assets

The Central Bank of Brazil (Bacen) began reducing the basic interest rate (Selic) in August 2023. Since then, the Brazilian stock market has appreciated, reflecting investors' greater appetite for risk. The Bacen is expected to continue reducing the Selic at the Monetary Policy Committee (Copom) meeting on Wednesday (13), with a probable drop of 50 basis points (bps).

Not only the domestic scenario, but also the international one is encouraging. Data from the US shows that inflation is converging towards the 2% target, with signs of a slowdown in the labor market, albeit resilient. This strengthens the scenario of an interest rate cut in the world's largest economy in the first half of 2024, paving the way for the Bacen to follow its policy of cutting interest rates.

Image 3: GDP Quarterly Rate Against Previous Quarter (%)

Source: Refinitiv

Recently, Brazilian GDP data was a surprise, with growth of 0.1% (projections pointed to -0.3%). Looking at the components of production, services and industry were the main highlights, with growth of 0.6% in both sectors. Agriculture, which enjoyed exceptional growth in the first quarter of the year, registered -3.3% in the last quarter, erasing part of its accumulated gains in 2023.

In general, projections indicate that Brazil should grow by around 3% this year, a very positive performance given the high and restrictive interest rate environment. However, some points of caution should be noted. The investment and savings rate fell from 18.3% to 16.3% compared to the same period last year. For the time being, the economy reflects the optimism of the country's disinflation process. However, it is important to think about long-term sustainable development, which depends on investment, and currently reducing.

Image 4: Investment Rate and Gross Savings Rate (%) - Brazil

Source: Refinitiv

Risks persist with public sector debt

While on one hand, the economic data is optimistic, on the other hand the country's growing debt is worrying and could be an obstacle to future growth. Despite the government's efforts to improve the primary result by raising more revenue, the net debt continues to increase with new government spending.

If fiscal balance is not achieved in the medium term, this should result in higher interest rates in the economy at some point, should the Central Bank stick to its goal of keeping inflation at 3% from 2024 to 2026. Alternatively, the government could change the inflation target, accommodating a higher price environment. However, this would result in a shock to investors' expectations, diminishing the country's attractiveness and damaging its medium and long-term growth.

Image 5: Net Debt Vs Primary Result - Brazil

Source: Refinitiv

In Summary

The strong GDP expansion this year shows that interest rates may not have been as restrictive as previously thought. With inflation under control and converging toward the target, there is no reason to change the pace of interest rate cuts.

Brazil's economic growth has been surprising in the post-pandemic period, probably as a result of structural reforms in recent years that have helped bring more dynamism to the Brazilian economy, such as the autonomy of the Central Bank.

However, the country still faces significant challenges. Fiscal balance has been one of the main difficulties in Brazilian politics, as the pressure for more public spending has undermined the primary result, even with a major effort to increase revenue.

Weekly Report — Macro

Written by Victor Arduin
[email protected]
Reviewed by Livea Coda
[email protected]
www.hedgepointglobal.com

Disclaimer

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