Brazil GDP rebounds sharply in third quarter, but stimulus withdrawal looms large

(Reuters) – Brazil’s economy grew in the third quarter by the most on record as the easing of anti-coronavirus lockdown measures triggered a strong rebound in activity across most sectors, especially industry and services, while fixed investment jumped sharply.

The rebound from the worst of the pandemic prompted a 7.7% increase in gross domestic product from the prior quarter, government statistics agency IBGE said on Thursday, less than the 9.0% median forecast in a Reuters poll of economists.

The rebound means Brazil’s economy is now the size it was in early 2017, after the record second-quarter plunge shrunk it to 2009 levels. It is still 7% smaller than at its peak in 2014.

(Graphic: Brazil GDP )

Reuters Graphic

The recovery was broad-based: industry grew 14.8%, household consumption 7.6%, fixed investment 11.0% and government spending 3.5%. Services, which account for over two thirds of all activity, grew by 6.3%, IBGE said.

Agriculture contracted slightly in the quarter by 0.5%.

The rebound shows that the economic hit from the COVID-19 pandemic has been lighter in Brazil than in other major Latin American economies. But that is in large part due to the government’s income transfers to millions of poor families, which are due to expire at the end of this year.

“If you look at household consumption, it is impossible to separate the recovery from the emergency aid. Impossible. Given that the program was reduced in the fourth quarter … that will be reflected in the Q4 numbers,” said Jose Francisco Goncalves, chief economist at Banco Fator in Sao Paulo.

“Next year, there will be no program, and the government, economists and media are underestimating the impact this will have on growth,” he said.

The Economy Ministry disagreed entirely. In a statement, it said the “strong recovery” shown in the latest figures means the economy can continue growing in the first half of 2021 without emergency government support.

“It is important to stress that the resumption of activity and employment in recent months will offset the reduction in aid,” it said.

The third quarter figures meant Latin America’s largest economy shrank 3.9% from the same three-month period a year ago, more than the 3.5% decline forecast in a Reuters poll.

First quarter GDP figures were revised to -1.5% from -2.5%, the second quarter to -9.6% from -9.7%, and 2019 growth was revised up to 1.4% from 1.1%, IBGE said.

In the first nine months of this year, the economy was 5.0% smaller than it was in the same period last year, it added.

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