After eight straight quarters of slim, but steady growth, the Brazilian GDP figures after Q1 2019 came as expected: showing that the country’s economy has contracted, starting off 2019 on the wrong foot. According to the Brazilian Institute of Geography and Statistics, the Brazilian economy shrank by 0.2 percent in the first three months of the year.

The figures come as a hit to President Jair Bolsonaro’s administration, which took office on January 1 promising a swift agenda of pro-market reforms that would quickly unclog investments in the country. Instead, uncertainties around Brazil’s political and economic environment hover around the administration—which has been incapable of passing its agenda in Congress.

</span></p> <p><span style="font-weight: 400;">As expected, the extractive sector had a dreadful performance (-6.3 percent), in the aftermath of the Brumadinho dam collapse on January 25. Following the disaster that killed 243 and left 27 people missing, Vale—the world&#8217;s largest iron ore producer—triggered a plan to decommission several of its mines, which took a toll on industrial output.</span></p> <p><span style="font-weight: 400;">The services sector—which has accounted for 76 percent of the Brazilian GDP—saw a weak increase of 0.2 percent, stifled by negative results from the transformative (-0.5 percent) and construction (-2.0 percent) segments.</span></p> <p><span style="font-weight: 400;">Agriculture also struggled, contracting 0.5 percent in the first quarter. The IBGE blamed underwhelming harvests of soy (-4.4 percent) and rice (-10.6 percent) as the main causes. Claudia Dionísio, of the IBGE&#8217;s National Calculations department, deemed the quarterly performance as &#8220;negative for all economic categories.&#8221;</span></p> <hr /> <p><img class="alignnone size-full wp-image-18231" src="https://brazilian.report/wp-content/uploads/2019/05/export-m7BvK.png" alt="brazilian gdp growth" width="1200" height="668" srcset="https://brazilian.report/wp-content/uploads/2019/05/export-m7BvK.png 1200w, https://brazilian.report/wp-content/uploads/2019/05/export-m7BvK-300x167.png 300w, https://brazilian.report/wp-content/uploads/2019/05/export-m7BvK-768x428.png 768w, https://brazilian.report/wp-content/uploads/2019/05/export-m7BvK-1024x570.png 1024w, https://brazilian.report/wp-content/uploads/2019/05/export-m7BvK-610x340.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <h2>Understanding the Brazilian GDP</h2> <p><span style="font-weight: 400;">The services sector has an undeniably large role in the Brazilian GDP, which can be explained by a shift in the country&#8217;s economy over the past few decades. Industry&#8217;s share of the GDP has been steeply falling, due to a lack of competitiveness from Brazilian producers against their foreign counterparts, and terrible side effects from the 2014–2016 recession—which led to the current scenario of a tremendous </span><a href="https://brazilian.report/money/2019/04/15/brazilian-industry-shrinking/"><span style="font-weight: 400;">idle capacity</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">Agribusiness, on the other hand, has performed very well in the past few years—but progress in farms tend to have little ripple effects on the overall population. And that&#8217;s due to the modernization of Brazil&#8217;s agriculture. The sector has progressively employed fewer people than it did decades ago—which mainly affects poorly-educated workers.</span></p> <p><span style="font-weight: 400;">“Industry is showing a very wobbly performance, while agriculture and cattle raising are doing fine. But farming has changed completely in Brazil. It now uses more machines and is not as labor-intensive as it used to be. So, services have absorbed many of these poorly-qualified workers in activities such as telemarketing,” explains Francisco Americo Cassano, an economics professor at Mackenzie Presbyterian University, in São Paulo.</span></p> <p><span style="font-weight: 400;">Another way to measure Brazil&#8217;s GDP performance is by looking at the demand. In Brazil, family consumption is a massive contributor, followed by government consumption and public and private investments, besides trade balance accounts.</span></p> <hr /> <p><img class="alignnone size-full wp-image-18232" src="https://brazilian.report/wp-content/uploads/2019/05/export-RUKjm.png" alt="brazil gdp quarterly" width="1200" height="800" srcset="https://brazilian.report/wp-content/uploads/2019/05/export-RUKjm.png 1200w, https://brazilian.report/wp-content/uploads/2019/05/export-RUKjm-300x200.png 300w, https://brazilian.report/wp-content/uploads/2019/05/export-RUKjm-768x512.png 768w, https://brazilian.report/wp-content/uploads/2019/05/export-RUKjm-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2019/05/export-RUKjm-610x407.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><span style="font-weight: 400;">Unlike agriculture, which focuses on foreign markets, the services sector is connected to the local economy. It creates a kind of feedback loop: people are employed in activities such as transportation, commerce, real estate, financial services, health, and education, which they will also need to use. If they don’t have a job, they won’t buy services; without consumption, unemployment rises.</span></p> <p><span style="font-weight: 400;">In Q1 2019, family consumption grew 1.3 percent in comparison to one year ago, but presented much more modest gains in relation to Q4 2018, increasing only 0.3 percent. This shows that while the economy has yet to fully emerge from the depths, there is some resilience propelled by the improvement of credit to consumers over this period.</span></p> <h2>What to expect moving forward</h2> <p><span style="font-weight: 400;">Obviously, a negative quarter is a warning, but it may be too soon to say Brazil is heading back to a recession. According to Mr. Cassano, the </span><a href="https://www.nexojornal.com.br/expresso/2019/05/27/As-vagas-formais-de-emprego-em-abril.-E-o-hist%C3%B3rico-do-Caged"><span style="font-weight: 400;">129,000 jobs created</span></a><span style="font-weight: 400;"> in April should be taken into consideration for further assumptions.  </span></p> <p><span style="font-weight: 400;">“There is a chance the second quarter may repeat the first’s performance, but it is too soon to say. We still don’t know the impacts of the job creations in April,” he said. </span></p> <p><span style="font-weight: 400;">Markets seem pessimistic, though. The Focus Report, a poll carried out by Brazil’s Central Bank among major market agents, is now projecting 1.23-percent GDP </span><a href="https://economia.estadao.com.br/noticias/geral,mercado-reduz-projecao-para-crescimento-do-pib-de-1-24-para-1-23,70002845054"><span style="font-weight: 400;">growth</span></a><span style="font-weight: 400;"> for 2019—against a 2.53-percent estimate at the beginning of the year. For many economists and the government, fiscal adjustments are crucial to bringing back confidence levels and investments—making the pension reform more and more important by the day.

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MoneyMay 30, 2019

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BY Natália Tomé Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.