Brazil’s economic growth bounces back under Lula and defies high interest rates

Brazil’s economy leaped in the first months of 2023, lifted by bumper harvests that outweighed the drag of double-digit borrowing costs.

Official data released on Thursday showed gross domestic product expanded 1.9 percent in the January-March period from the previous quarter, much more than the 1.2 percent median estimate of analysts surveyed by Bloomberg. From a year ago, the economy grew four percent.

A rebound in Brazil’s agriculture and a strong labor market helped deliver far better results than economists had forecast at the start of 2023, though few see it lasting. The highest interest rates in six years are weighing on business and consumer confidence — and have President Luiz Inácio Lula da Silva clamoring for drastic changes in monetary policy.

“I would’ve expected a heavier toll to be taken,” said William Jackson, Chief Emerging Markets Economist at Capital Economics. “It’s something we expect to happen over the course of this year as we see consumer spending and investment weaken.”

Brazil’s massive agricultural sector surged 21.6 percent and services advanced 0.6 percent, representing the main drivers of quarterly growth. Meanwhile industry fell 0.1 percent, the statistics agency said.

Three years since the global pandemic crashed the world’s economy, Brazil’s is proving resilient but worries abound about weak growth — and the potential risk of slipping back into recession. 

A similar story is playing out across the region as the weight of high borrowing costs drags down Latin America’s top economies.

The GDP reading is the first since Lula, as the 77-year-old leftist is known, took office for his third term. He has staked his presidency on fighting hunger and bringing back the glory Latin America’s biggest economy enjoyed when he led Brazil during the commodities bonanza of the 2000s. More than a few political observers doubt the he’ll take much comfort from the positive print.

“Lula will claim that the results could have been even better if interest rates were lower,” said Mario Braga, a São Paulo-based political analyst for the consulting firm Control Risks.

Since returning to power in January, Lula has clashed regularly with Central Bank President Roberto Campos Neto and cast current levels of borrowing costs — the benchmark Selic stands at 13.75 percent — as the country’s main obstacle to growth. 

But the monetary authority, which is autonomous from the executive branch, has been unmoved and offered no indications about possible easing. 

After fighting back a surge in inflation that followed the end of pandemic lockdowns, policymakers are concerned that prices will pick up again later this year. Annual inflation has slowed from last year’s peak of over 12 percent to 4.07 percent, near the Central Bank’s targets of 3.25 percent for 2023 and three percent for 2024, but Campos Neto has called for “patience and serenity” amid the slowdown.

Brazilians seem tired of waiting. Credit card rates and household defaults are surging. And businesses big and small are struggling as financing has been put out of reach for many shoppers.

“Today we are in a very difficult situation in this sector, because today nobody buys a car anymore,” Ciro Possobom, president of Volkswagen AG in Brazil, said in an interview.

The government has tried to cushion the impact of high borrowing costs with measures such as tax breaks and cash relief for the poor. But Lula is struggling to navigate a divided congress, potentially putting more his ambitious legislation to overhaul the economy at risk.

Meanwhile, many Brazilians are still feeling the pinch. Selma Fuentes, 48, a single mother who manages supplies for a construction company in the city of Mogi das Cruzes in São Paulo state, says she’s cutting back on groceries like beef and sweets. 

“Today it’s like a balancing act with money to manage the bills,” she said.

Solange Srour, chief economist for Brazil at Credit Suisse, says that the GDP data would ultimately serve to cement the central bank’s position, and that the economy would face higher rates for longer.

“A lot of people have set this resilience aside or want to see a glass more full than empty,” she said. “The truth is that when we celebrate that the economy is doing well, we have to be worried about inflation.”