Business is booming.

Brazil fourth-quarter GDP declines as economic challenges mount for Lula

Brazil’s economy stagnated in the final quarter of 2022, underlining the challenges facing president Luiz Inácio Lula da Silva as he aims to boost living standards and reduce poverty following a divisive election.

Gross domestic product contracted by 0.2 per cent in the last three months of the year from the previous quarter, when it expanded 0.3 per cent, according to official data released on Thursday. The weak performance, driven by shrinking industrial output and a cooling of services sector activity, interrupted five consecutive quarters of growth.

Alexandre de Ázara, chief economist at UBS BB in São Paulo, said the deceleration reflected the lagged effect of monetary policy. The Central Bank of Brazil has undertaken aggressive tightening in an effort to contain inflation, raising its base interest rate from an all-time low of 2 per cent two years ago to 13.75 per cent in August.

“There was also an increase in post-election uncertainty that caused a slowdown in investment, which had been the engine of growth,” said de Ázara.

Latin America’s largest economy grew by 2.9 per cent overall in 2022, buoyed by the lifting of Covid-19 restrictions and stimulus measures, including fuel tax cuts and extra welfare payments, implemented under previous president Jair Bolsonaro in his failed re-election bid. However, it was a decrease from the growth rate of 5 per cent recorded in 2021 as the country recovered from the coronavirus pandemic.

As high interest rates weigh on activity, the outlook is gloomier for Lula’s first year in office. Analysts predict annual economic expansion below 1 per cent for 2023.

“The slow pace of global growth may contribute to Brazil’s GDP remaining weak this year,” said Cristiane Quartaroli, economist at Banco Ourinvest.

The slowdown will complicate Lula’s ability to deliver on his campaign pledges. The veteran leftwinger began a third presidential term in January after a narrow victory over the far-right populist Bolsonaro in a run-off vote.

Lula has promised to eradicate hunger and raise incomes with an increased minimum wage, social benefits and public works, but he faces strained public finances with little room for manoeuvre in the budget.

The 77-year-old former metalworker, who last ruled between 2003 and 2010, has lashed out at the central bank over its benchmark lending rate, the second-highest among G20 nations after neighbour Argentina.

Lula believes this is harming the wider economy and has questioned whether the institution should remain independent, sending jitters through the markets and leading investors to raise their inflation expectations.

Although Brazil’s headline consumer price index has fallen below double-digit rates, at 5.8 per cent inflation remains above the official target of 3.25 per cent. Investors are also anxiously awaiting the formulation of a new fiscal rule governing the public accounts.

During his election campaign Lula vowed to scrap a constitutional clause that pegs increases in state expenditure to the rate of inflation. It is considered by mainstream economists as key for keeping public spending in check and maintaining economic stability.

“An interest-rate cut will only be possible if the government strengthens fiscal responsibility. While it remains unclear what rule will replace the spending cap, it will be very complicated,” said Camila Abdelmalack, chief economist at Veedha Investimentos.

Additional reporting by Carolina Ingizza

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