(Bloomberg) — Once again, Brazil’s economy started the year with a bang, beating forecasts and giving President Luiz Inacio Lula da Silva reason to celebrate. This time the victory is likely to be much less durable.
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After half a year of stagnation, gross domestic product rose 0.8% in the first quarter compared with the end of 2023, the national statistics agency said on Tuesday. Investments, agriculture, household consumption and services posted solid gains.
However, the pace of growth was not so much a result of the underlying strength of the economy, but more of government transfers, which temporarily boosted the spending power of consumers. Now the central bank is seen on the verge of stopping interest rate cuts and the administration is hampered by limited spending space. Together, the coming months look less rosy for Lula as he already deals with frustration over food prices and his response to devastating floods.
“We will lose momentum faster than last year,” Rafaela Vitoria, chief economist at Banco Inter SA, in Belo Horizonte.
Lula celebrated Tuesday’s data as proof that household demand is again powering Latin America’s largest economy, a rebound from the consumption boom of his earlier years in office.
Household consumption, one of the main drivers of the period, rose 1.5% from the previous three months and investment rose 4.1%, the statistics agency said. Services rose 1.4% as consumers unloaded their extra income.
“This is one more proof that we are going in the right direction,” the president wrote on X after the release.
‘Very worried’
Many economists warn that the first-quarter growth is likely to be a one-off rather than the start of a strong recovery given the drag on double-digit borrowing costs.
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“Gains in household consumption and investment led to strong GDP growth in the first quarter in Brazil, with a healthier composition than in previous quarters. Relatively tighter financial conditions and the effects of massive flooding in the southern part of the country are likely to dampen growth from the second quarter and add a slight downward bias to our expectations for 2% growth in 2024.
— Adriana Dupita, Brazil and Argentina economist
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The activity was also fueled by the billions of dollars the federal government injected into the economy by paying large amounts of claims, known as “precatorios,” in court cases it had lost. Starting late last year, the government was saddled with debt worth 94 billion reais ($17.9 billion), or about the equivalent of about 0.8% of GDP, according to Goldman Sachs Group Inc.
Brazilians also benefited from a 7% increase in the minimum wage that took effect in January, as well as social security disbursements. Economists say the transfers have a more limited ripple effect than last year’s agricultural boom.
While growth is likely to moderate, it is unlikely to reach sluggish, pre-pandemic levels — especially with midterm elections later this year, according to Alberto Ramos, chief Latin American economist at Goldman Sachs.
“President Lula is very concerned about his growth and popularity.” Ramos said. We expect it to “grease the wheels of growth moving forward,” he said.
Suppressed voters
Lula managed to achieve a healthy economic expansion without budget shocks last year thanks largely to what has been called the “super harvest.” Record-breaking crops such as soybeans and corn helped the resource-rich nation beat analysts’ most pessimistic forecasts in early 2023.
Agriculture gained 11.3% in the first quarter of 2024, well below last year’s highs. The industry fell 0.1%, a trend analysts expect to continue as high borrowing costs hurt output.
Even voters are feeling the pinch. Recent polls show Lula’s approval rating has fallen to around 50%, the lowest of his term, as Brazilians express concern about crime and more expensive food.
At the same time, he has suffered a series of defeats in Congress for his legislative initiatives.
While headline inflation cooled over the period, tight monetary policy is not expected to bring much further relief to price growth. Meanwhile, flood damage in Rio Grande do Sul state, an agricultural powerhouse that accounts for about 7% of the Brazilian economy, is still being tallied as waters there gradually recede.
The situation has left investors worried that the government will further back away from Finance Minister Fernando Haddad’s promises to shore up public accounts.
“The risk is real,” said Thiago de Aragao, head of strategy at Arko Advice, a consulting firm. “The only way for him to regain popularity, for him to regain power in Congress, for him to become a more influential president is through spending.”
–With assistance from Giovanna Serafim, Robert Jameson and Bruna Lessa.
(Reposts story, adds comments from economists and political analysts starting in fourth paragraph)
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