Brazil & Southern Cone - March 2024

During his first year back in office, Brazil’s President Luiz Inácio Lula da Silva got a solid boost from the economy to help appease his political foes and finance his social welfare programmes. On the back of a bumper crop, GDP expanded almost 3% last year, nearly quadruple initial projections.

This year the shoe is on the other foot. The farming sector has lost some of its shine and the economy is projected to slow to nearly half the pace of 2023. Agriculture GDP is set to stagnate this year, after expanding an exceptional 15.1% in 2023. The farm lobby CNA foresees a contraction of up to 1%. That’s largely because of a smaller grain harvest and lower global food prices.

Lula, who has a high rejection rate in rural areas in part because of his policies favouring the environment and indigenous peoples, is now touring agricultural fairs and events across the country and hosting a string of his traditional “power barbecues” to please farm lobbies. The idea is to help gain political support, but the outcome may well boost output as well.

“I am aware that their problem with us is ideological. It's not about money,” Lula said. “We’re going to present a good harvest financing plan because we want the farm sector to continue producing, planting more so we can export more.”

But it’s not just a weaker farm sector that has slowed the economy. The feel-good effect of initial wage and welfare increases, and relatively high borrowing costs of 6% in inflation-adjusted terms, are weighing on consumer consumption. Industrial output also decreased, by 1.6% in January from the month prior. That comes on top of two consecutive quarters of no economic growth at all. Some observers argue that 2023 was the anomaly, and that now Brazil’s economy has returned to a pace more in line with its capacity.

Brighter outlook

And yet there are signs that the economy may have bottomed out already, starting with an improved inflation outlook, which should help bolster household purchasing power and may allow the central bank (BCB) to cut interest rates more aggressively. The Selic benchmark rate is to fall from 11.25% to 9% this year, according to the BCB’s latest Focus bulletin, a weekly survey of economists.

At the same time the Lula administration has been seeking to stimulate economic growth by offering tax stimulus and other incentives to companies that invest in green and energy-efficient technologies. In the auto industry in particular such incentives seem to be having an impact, as manufacturers are pouring fresh capital into their plants.

• Auto-makers are investing

Stellantis NV, the group that owns brands like Citroën, Fiat, Jeep, and Peugeot, said it will invest R$30bn (US$6.1bn) to boost production of flex-hybrid models for domestic and foreign markets. Japan’s Toyota Motor Corp has earmarked R$11bn for Brazil through 2030. Volkswagen and General Motors will invest R$9bn and R$7bn, respectively, to help retool their plants.

One line of thought is that Brazil is benefitting as many Western economies are resourcing raw materials, energy, and, to a lesser extent, manufacturing away from China and Russia for geopolitical reasons and increased supply chain security. Foreign direct investment (FDI) in Brazil last year was the third-highest in the world, after the US and China, and is projected to grow by some US$2bn this year to around US$70bn. Indeed, FDI in January came in at US$8.7bn, more than double the consensus forecast.

Economists seem to have noticed and are beginning to increase their growth projections for 2024. Since December, the median forecast for GDP growth in the Focus report jumped from 1.5% to 1.8%. There could be a potential repeat of last year’s consecutive growth upgrades.