Brazil’s Economy Disappoints After Bolsonaro’s Stimulus Push

Andrew Rosati
·3 min read
  • Oops!
    Something went wrong.
    Please try again later.

(Bloomberg) -- Brazil’s economic growth fell short of expectations in the third quarter after a multi-billion dollar fiscal stimulus package expanded welfare for the poor and slashed taxes.

Most Read from Bloomberg

Official data released on Thursday showed gross domestic product expanded 0.4% in the July-September period from the previous quarter, below the 0.6% median estimate from analysts in a Bloomberg survey. From a year ago, the economy grew 3.6%.

Latin America’s largest economy gained in the third quarter, when President Jair Bolsonaro’s aid package, introduced to boost his re-election prospects, took full effect. While key drivers such as consumption and services rose, analysts warn that momentum may fizzle out as re-opening effects fade and temporary benefits, such as tax breaks on utilities, start to expire.

What Bloomberg Economics Says

“Brazil’s modest third-quarter GDP growth was driven by a strong fiscal impulse and residual effects of reopening. But the lagged impact from 1175 basis points of rate hikes since 1Q 2021 should slow growth in the coming quarters.”

-- Adriana Dupita, Brazil economist

Click here for full report.

The quarterly increase was driven by 1.1% growth in the services sector, which accounts for about 70% of the Brazilian economy. Industry climbed 0.8%, while agriculture shrank 0.9%, the national statistics agency said. Brazil’s GDP has now expanded for five-straight quarters.

The nation’s strong service sector and pent-up demand from the pandemic are reason to be optimistic about the economy in the near term, according to Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.

“These drivers have fully offset the hit from tighter financial conditions, pre-electoral increased political noise, and high—albeit falling—inflation,” he wrote in a research note.

Momentum

Real activity is now 4.5% above the pre-pandemic level and 1.4% above the previous high in the first quarter of 2014, according to Alberto Ramos, chief economist for Latin America at Goldman Sachs & Co.

Growth momentum is expected to ease going forward after the central bank lifted its interest rate by 11.75 percentage points over a year and a half to battle inflation. Policymakers paused their hikes in September, and many economists say the full effects of tightening on activity have not yet materialized.

Concern over a possible jump in spending under President-elect Luiz Inacio Lula da Silva has many investors betting inflation will be slow to ease to target, hence prompting policymakers to delay rate cuts that would help growth.

The incoming administration, which has pledged to extend popular monthly payments of 600 reais ($115), is deliberating with congress on a proposal to exclude billions of dollars in expenditures from a public spending cap.

Worries over Brazil’s public accounts are also running high as Lula seems poised to pick a less-economically orthodox ally, former Sao Paulo Mayor Fernando Haddad, as his finance minister.

Read more: Lula Leaning Toward Ex-Mayor Haddad to Helm Brazil Economy

The economy is “losing momentum, not only because of the fiscal situation, but mostly because of commodities and the interest rate,” said Sergio Vale, chief economist with MB Associados, a consultancy in Sao Paulo. “The uncertainties about the new minister only worsen the situation.”

--With assistance from Giovanna Serafim.

(Recasts lead, adds analysis throughout.)

Most Read from Bloomberg Businessweek

©2022 Bloomberg L.P.