Brazil: Activity Data Paints a Bleak Picture
The major activity indicators point that the Brazilian economy is running close to a stagnant state, especially in the Industrial and Services sector. The Agricultural sector is expected to expand their production during 2023, especially soybeans, which is expected to help the GDP figures to be on positive terrain in the first quarter of the year.
Figure 1: Activity Indicators (2019 = 100, Seasonally Adjusted)
Source: IBGE
The major activity indicators in Brazil, including the industrial production Index, services volume, and retail trade, suggest that the country's economic activity is expected to remain close to a stagnant state. While these measures do not always perfectly align with GDP figures, they serve as reliable leading indicators.
The industrial production index exhibited no growth in the first quarter of 2023, primarily due to well-known factors such as persistent inflation that continues to impact production costs. Furthermore, higher interest rates not only affect credit costs but also dampen domestic demand for their products. Their main export market, Argentina, is also experiencing unfavourable conditions due to the ongoing chaos in their economy (here).
Services volume recorded a slight decline (-0.3%) during the first quarter, indicating the absence of post-COVID-19 recovery effects. The services sector, lacking support in terms of demand, must strive to achieve growth independently. On a positive note, the retail trade sector demonstrated a 2% growth during the same period, rebounding from a poor performance in Q4.
However, the agricultural sector brings good news. Brazil's agricultural production, especially in grains, is projected to experience a significant surge in 2023, with estimates indicating a 15% increase in grain production. This growth is predominantly driven by soybeans, which could compensate for Argentina's lower soybean production in the international commodity markets. The soaring soybean prices of last year prompted numerous producers to expand their harvests for 2023, although they might face selling their products at lower prices. While the agricultural sector only accounts for 7% of the total economy, this increase in production is likely to contribute to GDP growth and ensure the Q1 figures are in the positive terrain.
Overall, the Brazilian economy is performing in line with our expectations except for the Agricultural sector. As this is the smallest sector of the economy we believe the above than expected production will not affect greatly our growth forecast for the Brazilian economy. We will wait to further data to come out to update our growth forecast for Brazil.