Brazil Economy Beats Forecasts, Exits Recession on Farming

(Bloomberg) -- Brazil's economy exited recession at the end of 2021, lifted by higher raw material prices and services that provided some relief to a country afflicted by soaring inflation and interest rates going into an election year.

Gross domestic product grew 0.5% in the October-December period after posting declines in the two prior quarters. The expansion matched the highest estimate in a Bloomberg survey of analysts, which had a 0.1% median forecast. Overall, the economy grew 4.6% last year, the national statistics agency said on Friday.

Latin America's largest economy rebounded in 2021 as fewer Covid-19 restrictions allowed businesses to reopen while access to vaccines enabled Brazilians to return to their pre-pandemic lives. Still, looking ahead, an array of factors from high borrowing costs and unemployment to double-digit inflation are dragging on the outlook.

Brazil holds elections in October and polls widely show President Jair Bolsonaro trailing front-runner Luiz Inacio Lula da Silva.

What Bloomberg Economics Says
“The stronger-than-expected gain was concentrated in a handful of sectors, with significant contraction in important activities. The risk of war-driven cost increases and supply-chain disruptions, along with tighter financial conditions domestically, suggest growth will slow in the quarters ahead. Still, the surprise 4Q print could prompt a mild upward revision in market forecasts for 2022 growth.”
--Adriana Dupita, Latin America economist
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After being buffeted by extreme weather conditions earlier in 2021, the agriculture sector grew 5.8% in the fourth quarter. Services and household consumption were up 0.5% and 0.7% respectively, while industry shrank 1.2%.

Rate Hikes

The stronger finish to 2021 tempered some negativity toward this year. Gross domestic product “might not fare as badly as some of the more pessimistic forecasts in the consensus range,” William Jackson an economist at Capital Economics wrote in a note. “But equally, there's not much cause for optimism.”

Indeed, soaring prices of raw materials such as soy may provide a tailwind to the agriculture sector while also helping to buoy the real. Brazil's GDP growth surged during the last commodity super cycle over a decade ago.

Still, the recent commodities rally is also contributing to inflation, helping push up consumer prices above 10%. In response, the central bank has lifted the benchmark Selic rate 875 basis points -- to 10.75% -- since last March.

The bank's efforts have yet to significantly slow down inflation. Complicating matters further, traders are boosting bets that borrowing costs will have to rise above 13% amid global food and fuel price shocks from Russia's invasion of Ukraine, a move that would tighten the squeeze on consumers.

Contracts on interest-rate swaps due in January 2023, which indicate expectations about monetary policy at year's end, rose 20 basis points in late morning trading on Friday as investors weighed odds of an even longer tightening cycle. The real fell 1.3% to 5.0925 per dollar.

To cushion the economic hardship, Bolsonaro has once again expanded cash transfers to the poor. The aid has raised investor concern about the future of Brazil's public finances, and has done little to boost lackluster forecasts.

Before Friday's release, analysts surveyed by the central bank saw the economy expanding just 0.3% this year, and 1.5% in 2023.