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Brazilian economy slips into recession for second time in less
than two years
Central Bank steps up tightening as inflation stuck in
double-digits
PMI data point to weakness in manufacturing but resilience in
services for last quarter so far
Brazil dipped back into recession in the third quarter of 2021
as a severe drought hugely impacted farmers. PMI data for the
fourth quarter so far showed a resilient service sector, but
factory production contracted to a greater extent as demand was
stymied by rising interest rates and price pressures. With
inflation mounting, the central bank hiked the policy rate for the
seventh time running, a factor that could hurt consumption and
investment in coming months.
Economy in recession as unprecedented drought hits
agriculture sector
Official statistics data for the third quarter of 2021
highlighted another quarterly contraction in GDP as the agriculture
and livestock sector posted its worst performance (-8.0%) in
nine-and-a-half years due to a severe drought. Industrial
production stabilised (0.0%), with companies in this segment
negatively impacted by supply-side issues and mounting inflationary
pressures. Services activity expanded (+1.1%) in what appears to be
a shift in demand from goods to services as COVID-19 restrictions
recede. Encouragingly, domestic consumption rose (+0.9%), but
exports decreased sharply (-9.8%).
Industrial production figures from IBGE showed another monthly
reduction in output during October, the fifth in successive months.
Timely PMI data indicated that the
manufacturing sector remained stuck in contraction, with the
downturn gathering pace during November. Companies indicated that
order book volumes were down markedly, owing to higher interest
rates and inflationary pressures. Elevated prices for inputs also
restricted input buying and job creation as companies focused on
cost-reduction measures.
Conversely, demand for Brazilian
services remained resilient in spite of the intensification of
inflationary pressures and recent rises in borrowing costs.
PMI survey participants registered the fastest upturn in new
business since March 2019 and a solid, albeit slower, expansion in
output during November.
Inflationary pressures show no signs of
abating
Price pressures in Brazil remained elevated, as global shortages
of inputs and supply-chain disruptions were exacerbated by an
unprecedented drought and associated increases in energy prices.
Official inflation climbed to 10.7% in October, the highest since
January 2016 and more than double the central bank's upper-limit
goal (5.25%) for 2021.
While PMI data showed that input costs continued to rise at a
stronger rate in manufacturing than in services midway through the
final quarter of 2021, the latter registered a survey record
increase (data collection started in March 2007). Subsequently, the
aggregate rate of input cost inflation climbed to a series
peak.
Additional cost burdens continued to be passed on to consumers
in November, with prices charged for goods and services increasing
further. At the private sector level, the PMI results highlighted
the third-sharpest rise in output prices since comparable data
became available in early-2007.
Elevated inflation fuels aggressive rate
hikes
The official interest rate (SELIC) that was at a near 24-year
low of 2% in February has been raised for seven consecutive times
as the central bank attempts to meet its primary goal of price
stability. For 2021, the inflation target is 3.75%, with a ceiling
of 5.25%. The policy rate was lifted to 9.25% in November, the
highest in over four years.
Survey participants of the manufacturing PMI panel continued to
indicate that rising interest rates had a negative impact on the
performance of the sector during November, and companies became
increasingly concerned that future consumption and investment would
be restricted by rising borrowing costs and inflationary
pressures.
Indeed, a large proportion of purchases in Brazil are attained
on credit and indebtedness is on the rise. Preliminary data from
the central bank showed an increase in household debt to 59.9% of
national income. Excluding mortgages, household debt amounted to
37.0% of GDP.
This is particularly concerning as the cost of borrowing is
rising. In August, the annual interest rate on a credit card for
households averaged 63.8% and that for overdrafts stood at
125.1%.
Throughout the COVID-19 crisis, access to credit helped
households to maintain their purchasing standards and support
living costs amid a reduction in real income due to the pandemic
and rising inflation.
However, looking ahead, ongoing rises in banking rates could
curtail consumption, investment, gross domestic product, employment
and real wages. Brazil's economy could face many other headwinds,
such as sustained periods of elevated inflation, new waves of
COVID-19, political gridlock, currency volatility, lingering issues
in supply chains and deteriorating market confidence.
Upcoming releases of PMI data will prove useful in highlighting
how recent developments affected the private sector economy in the
final month of the year.
To hear about this story and much more, tune into our latest
podcast
here.
Posted 09 December 2021 by Pollyanna De Lima, Economics Associate Director, Economic Indices, S&P Global Market Intelligence
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
