Brazil’s 4Q22 GDP contraction signals challenge for Lula

BRASILIA, Brazil (AP) — Brazil’s economy contracted last quarter for the first time in over a year, government data showed Thursday, in a downturn expected to complicate President Luiz Inácio Lula da Silva’s first year in office.

Latin America’s largest economy shrank 0.22% in the final three months of last year, weighed down by declines in industry, according to data from the country’s statistics institute.

Oil production was the only bright spot of the industrial sector in the fourth quarter, with manufacturing, construction and utilities all contracting, the institute said.

“It’s a scenario of economic reversal at the end of last year that tends to continue this year,” said Sérgio Vale, chief economist at MB Associados, who also said high interest rates were impacting the economy.

Brazil’s Finance Minister Fernando Haddad noted that the central bank last year “took a very drastic decision” to boost interest rates and damp inflation amid Bolsonaro’s election-year spending.

“But the fact is that the economy is decelerating. So we have to harmonize fiscal policy and monetary policy so Brazil doesn’t decelerate any more,” he told reporters.

Brazil’s President Lula campaigned on eradicating poverty last year and has spent considerable time bemoaning the fact that the central bank has held its benchmark rate at its highest level since 2016 — 13.75% — most recently at its monetary policy meeting last month. There have been calls from members of his party to force the removal of the central bank’s president, despite the fact the monetary authority has formal independence.

“A recession is Lula’s big nightmare,” said Thomas Traumann, an independent political analyst, adding that the president has begun “pushing all the buttons he can reach to try to mitigate the effects of an economic retraction among the poor, his main electoral base.”

Such moves include boosting the minimum wage above inflation, exempting taxes for low-income workers as well as plans to create a program to renegotiate poor peoples’ debts, Traumann said.

On Thursday, he presented the relaunch of his social welfare program, Bolsa Familia.

It will serve 21 million impoverished families who will receive a base monthly payment of 600 reais ($115). Under new provisions, families will get additional amounts depending on their number of children and their ages, as well as an additional amount for pregnant women.

“Bolsa Familia is just a piece of the things we will do,” Lula told a crowd in Brasilia. “We aren’t promising that Bolsa Familia will resolve all the problems of Brazil’s society. But together with it there must be a policy of economic growth, of job creation and transfer of income.”

The program had been a flagship of his previous governments, and helped tens of millions of people escape poverty. It was rebranded as Brazil Aid by former President Jair Bolsonaro during the COVID-19 pandemic.

Alberto Ramos, Goldman Sachs’ chief Latin America economist, wrote in an emailed statement that he anticipates further headwinds for Brazil’s economy in the first half of 2023, pointing to high interest rates, elevated household debt levels, declining job creation and soft business and consumer confidence.

GDP expanded 2.9% in the full year of 2022, down from the 5% rebound registered in 2021 following the pandemic-induced recession, according to the statistics institute.

Vale forecasts growth of just 1% this year, with industry sinking further and agribusiness almost wholly responsible for keeping overall GDP in positive territory.

“Our challenge we have now is to make the economy resume growth,” Lula said in Brasilia.


Biller reported from Rio de Janeiro.

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