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 President Lula 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. Lula campaigned on eradicating poverty and plans to revamp the social welfare program, Bolsa Familia.
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.