understanding GDP fluctuations in Brazil and how to achieve long-term growth
Countries like China, India, and Brazil (all part of BRICS) are fast-growing emerging markets that have been expanding at the fastest pace these past few months since last summer, and they’re in the world’s top 10 largest economies as of 2023. Where does this growth come from and what does it really mean? If we look under the GDP umbrella, we can understand a lot more what these economic fluctuations entail.
Let’s break this down with an example: Brazil. When I lived in São Paulo the first month of 2023, it was bustling with people and commerce. I grabbed coffee with a founder building a platform to connect farmers with supermarkets, and I witnessed the digital transformation of payment systems by Nubank and Pix. However, the root cause for GDP growth isn’t immediately clear at the ground level.
Brazil’s GDP grew by 2.9% in 2023. All GDP sectors grew at the same time (consumption, net exports, government spending, and investment). Below is a dive on each sector:
Consumption
Brazilians have been benefiting from falling interest rates and a relatively tight labor market.
- Lower interest rates: Consumers are more likely to take on mortgages to make large purchases such as buying a car.
- Lowest unemployment rate since 2015: Workers are able to negotiate for higher wages and employers are competing for worker supply. This has further increased consumer purchasing power.
This component on its own has concerned market analysts, since higher consumer spending can lead to demand-pull inflation. Consumer demand exceeds productive capacity — businesses simply increase prices instead of relying on more supply.
Investment
A driver for household and business investments is credit expansion — more competitive credit rates and more credit opportunities. Brazil’s private-capital industry has attracted foreign investors, such as U.S. asset managers looking to expand in new regions, as investment risks increase in other markets, such as China. Private sector credit has risen exponentially to 5.55M BRL million as of the start of 2024.
Again, this growth component needs to be matched by continued economic support in other areas. An excessive increase in credit can lead to over-leveraging by businesses and consumers, making them more vulnerable to economic downturns or changes in interest rates. Another danger to avoid is an asset bubble, with consumers investing increasingly in real estate, stocks, or other assets.
Government spending
Government expenditure increased under president Lula by 12.5% in real terms. This was Lula’s first year, and he likely wanted to impress in his first 100 days and follow through on his social welfare promises.
One of the social welfare programs that has been boosted by government funds is called Bolsa Familia. Bolsa Familia is a conditional cash transfer program that provides more than a quarter of the population with an average of US $136 per month.
This GDP component is actually very important because it transfers wealth from the top of the funnel (tax income) to the rest of the population. In 2023, Brazil saw a real increase of 11.7% in the mass of labor income, the highest it’s been since 1995. Studies suggest programs like Bolsa Familia is one of the main explanations for a population-wide jump in income in 2023. The people who receive these cash transfers are using their income to purchase necessary goods and make productive investments, leading to further economic development.
And finally, exports
Though the previous components played a role in short-term GDP expansion and possibly long-term GDP expansion in the case of government spending, the real sustained impact can be seen in exports, specifically in Brazil’s natural resource industries.
Historically, around 60% of Brazil’s GDP has consistently relied on consumer spending, a proportion that is almost equivalent in the U.S., for context. However, about half of Brazil’s GDP growth in 2023 was due to the agriculture and extractive industries, which each grew by 9–15%. This is unprecedented growth and GDP contribution. Specifically:
- Agriculture industry: soybean and corn harvest
- Extractive industry: growth in oil, natural gas extraction, and iron ore extraction and pelletizing
One of the necessary foundations for Brazil’s success in agriculture and extraction was the year’s climate, causing record production in crops and favorable water conditions for resource extraction. But Brazil took full advantage of these favorable conditions and catalyzed its growth.
Brazil was poised to capitalize on these agricultural fluctuations in multiple ways. Firstly, it’s an agribusiness powerhouse. Its agribusiness industry accounts for 22% of the country’s jobs, as opposed to 10% in the U.S., which means there’s a large workforce ready to manage a flourishing production chain of agricultural goods.
Secondly, Brazil has established great trading relations with China, its main trading partner. China bought 73% of Brazil’s soybean exports in 2023, as well as 64% of iron ore and 47% of crude oil. China has even sent Brazil agricultural machines as part of their trade cooperation. Both partners are invested in improving each other’s food access and economies in general.
A common factor across Brazil, India, and China is their abundant natural resources. Brazil is poised to succeed because it has massive trade advantages in multiple resources and thriving trade relationships with powerful partners. This way, it’s able to maintain net export income while importing enough to meet supply for its rapidly rising consumer spending. Brazil will not only grow in GDP, but its quality of life across its population will improve as well — Brazilians of all socioeconomic classes will be able to use their government benefits or make productive investments in order to play a growing role in the economy and thrive alongside it.
