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Brazil 3Q GDP Contracted 0.1% Vs. 2Q After Drought Hit Agriculture -- Update

12/02/2021 | 09:11am EST

By Jeffrey T. Lewis

SÃO PAULO--Brazil's economy shrank in the third quarter from the previous three months, the second consecutive contraction, after a drought hit agricultural production and outweighed growth in the service sector.

Gross domestic product expanded three quarters in a row starting from the third quarter of last year, rebounding from the worst period of the coronavirus pandemic, but Brazil's economy is now struggling to grow amid rapidly rising prices and the logistics problems that for months have plagued countries around the world.

"After the recovery following the early months of the pandemic, we're seeing the start of an exhaustion of that effect. Higher interest rates, high unemployment, supply problems are all issues," said Marcos Ross, chief economist at Haitong Investment Bank Brazil. Services growth is showing signs of slowing in the fourth quarter, which could lead to a third quarterly contraction in the final three months of this year, he added.

Gross domestic product contracted by 0.1% in the three months through September compared with the second quarter of 2021, and expanded 3.9% from the third quarter of 2020, the Brazilian Institute of Geography and Statistics, or IBGE, said Thursday. In the second quarter, GDP shrank by a revised 0.4% from the first quarter and expanded by a revised 1.9% from a year earlier, the IBGE said.

The advance of Brazil's vaccination programs against the coronavirus has allowed businesses to reopen, and even with inflation eating away at some of the potential gains from the increased activity, household spending rose 0.9% on the quarter and was up 2.1% from a year earlier, the IBGE said. Services expanded 1.1% in the quarter and grew 3.3% from a year earlier, it said.

Brazil's 12-month inflation rate reached an almost six-year high of 10.67% in October, and in response to rising prices, the country's central bank has been raising interest rates to slow inflation. The bank's policy makers increased the benchmark lending rate, the Selic, to 7.75% in October and said it expects to raise the rate to 9.25% next week at its final meeting of the year.

The higher cost of borrowing generally takes about six months to have an effect on growth, so it is worrisome that the full effect of the recent rate increases is still to come, according to Nicolas Borsoi, chief economist at the Nova Futura brokerage in São Paulo.

"The economy is already getting worse before the full effect of the hikes," he said.

Gross fixed capital formation, a measure of investment, declined 0.1% in the third quarter and soared 20.2% from a year earlier. The effect of rising lending rates on investment will be stronger next year, and businesses will also be more cautious because of the presidential elections next October, Mr. Borsoi said.

After a drought that started late last year and continued well into 2021 slammed the country's corn, sugarcane and coffee crops, agricultural production plunged 8.0% in the third quarter from the second while increasing 0.2% from a year earlier.

Brazil is an agricultural powerhouse, the world's biggest producer and exporter of coffee, soybeans and sugar, and the economy should benefit from bigger agricultural production in 2022. Many analysts are already predicting another record crop of soybeans for the 2021-2022 growing season, which is already underway and will be harvested at the start of next year.

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com

(END) Dow Jones Newswires

12-02-21 0911ET

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