Brazil’s economy stalled last year; Lula blames high borrowing costs

BRASILIA  -Brazil’s economy shrank in the fourth quarter, official data showed on Thursday, adding to an overall slowdown last year as President Luiz Inacio Lula da Silva again blasted the central bank for high interest rates impeding a swifter recovery.

The economy contracted 0.2 percent in the October-to-December period, compared with the previous quarter, according to official statistics agency IBGE.

The decline in gross domestic product, which casts a shadow over the 2023 outlook for Latin America’s biggest country, largely matched the drop forecast in a Reuters poll of economists.

Lula, reiterating his critique of the country’s independent central bank in an interview with local broadcaster BandNews FM on Thursday, warned that Brazil could “soon” suffer a credit crunch if interest rates remain high.

“This citizen who was not elected to anything thinks he has the power to decide things,” Lula said, referring to central bank chief Roberto Campos Neto. “This country can’t be held hostage to a single man.”

Lula’s finance chief, Fernando Haddad, said earlier on Thursday he does not expect the economy to contract again in the current quarter, which would mark a technical recession, but he said Brazil’s benchmark interest rate of 13.75 percent was undermining economic growth.

He argued that the government has been doing its part to pave the way for monetary easing after partially resuming federal taxes on fuels to boost revenues.

Losing momentum

Industrial production in Brazil, the region’s largest economy, shrank 0.3 percent during the final three months of last year, while the agriculture and service sectors grew by 0.3 percent and 0.2 percent, respectively, according to the IBGE.

Compared with the year-ago period, Brazil’s economy expanded by 1.9 percent in the fourth quarter, which fell short of the projected 2.2 percent rise.

Overall, GDP grew 2.9 percent last year, losing steam from the post-pandemic expansion of 5 percent in 2021.

The biggest contribution to growth in 2022 came from the service sector, which climbed 4.2 percent, followed by industry, which expanded by 1.6 percent. The economy was held back by a 1.7- percent contraction in the big farm sector due largely to a drop in soybeans production, Brazil’s main crop.

On the demand side of the ledger, household consumption rose 4.3 percent, while government spending increased 1.5 percent.

Joao Savignon, head of macroeconomic research at Kinitro, said the economy continues to lose momentum. But he speculated that the slowdown could be partially compensated this year by consumer spending plus better performance from the agricultural sector, yielding projected growth of 1.2 percent for 2023.

Private economists polled by the central bank expect a 0.84- percent uptick in GDP this year.

Economic growth in 2022 was boosted by a stronger job market in addition to fiscal stimulus pushed by former President Jair Bolsonaro ahead of his failed re-election bid.

Lula has consistently argued that the economy suffers from excessively high borrowing costs, which the central bank has hiked to a six-year high to combat inflation.

Finance ministry economists warned in a statement later on Thursday that the current benchmark interest rate is bad for both bank and non-bank credit, posing a risk to economic activity this year by making it difficult for companies to roll over debt.

The SPE economists added that growth will likely get a boost from a record grain harvest expected this year and an increase in the minimum wage as well as income tax relief for lower-earning workers.

($1 = 812.0500 Chilean pesos)