Brazil, the largest economy in Latin America, has entered a technical recession after its gross domestic product (GDP) contracted for the second consecutive quarter in 2023, according to official data released on Thursday.
Drought and frost hit the agriculture sector
The Brazilian economy shrank by 0.1% in the third quarter of 2023, following a revised decline of 0.4% in the previous quarter, the national statistics agency IBGE said. The downturn was mainly driven by a sharp drop in the agriculture sector, which fell by 8% in the quarter amid drought and frost that affected crops such as coffee, cotton, and maize.
The agriculture sector, which accounts for about 5% of Brazil’s GDP, had been one of the main drivers of the country’s recovery from the pandemic-induced collapse in 2020, when the economy contracted by 4.1%. However, the adverse weather conditions in 2023 have reversed the trend and reduced the output of some of the country’s main exports.
Services and consumption show resilience
On the other hand, the services sector, which represents about 70% of Brazil’s GDP, grew by 1.1% in the third quarter, boosted by the easing of pandemic-related restrictions and the expansion of the vaccination campaign. The services sector includes activities such as trade, transport, finance, education, and health.
Family consumption, which accounts for about 65% of Brazil’s GDP, also increased by 0.9% in the quarter, reflecting the improvement in the health situation and the income support measures implemented by the government. However, the consumption growth was lower than expected, as high inflation, rising interest rates, and unemployment weighed on consumer confidence and purchasing power.
Industry stagnates amid supply chain disruptions
The industry sector, which contributes about 20% of Brazil’s GDP, showed no growth in the third quarter, as supply chain disruptions, higher energy costs, and weak domestic demand hampered its performance. The industry sector includes manufacturing, construction, mining, and utilities.
The supply chain problems, which have affected many countries around the world, have caused shortages of inputs, delays in deliveries, and higher prices for some products. The energy crisis, which has forced the government to ration electricity and increase tariffs, has also added to the challenges faced by the industry sector.
Outlook remains challenging
The recession in Brazil comes as a blow to President Jair Bolsonaro, who is facing a tough re-election campaign next year amid low approval ratings, corruption allegations, and criticism over his handling of the pandemic. Bolsonaro has tried to boost his popularity by increasing social spending and launching a new cash transfer program for the poor, but his fiscal stimulus has raised concerns about the sustainability of the public debt and compliance with the spending cap rule.
The outlook for the Brazilian economy remains challenging, as the central bank is expected to raise interest rates further to contain inflation, which reached 10.67% in October, the highest level since 2016. The monetary tightening, along with the uncertainty over the fiscal and political scenarios, is likely to constrain consumption and investment in the coming months.
According to a central bank survey, the market consensus is for a GDP growth of 4.78% in 2023, down from a previous forecast of 5.3% in July. However, some analysts have warned that the growth rate could be lower, especially if the new Omicron variant of the coronavirus, which has been detected in three cases in Brazil, poses a threat to the health situation and the recovery.
