(Bloomberg) -- Brazil’s economy once again shot past expectations in the third quarter, bolstered by hefty consumer and government spending that’s fanning above-target inflation and rattling markets.
Official data released on Tuesday showed that gross domestic product expanded 0.9% in the July-September period compared to the second quarter. The expansion came on the back of robust domestic demand that has held firm in the face of double-digit borrowing costs.
Record low unemployment and higher wages have propelled growth this year, giving President Luiz Inacio Lula da Silva reason to argue he’s delivering on pledges to better the lives of working Brazilians. For the third straight time in 2024, quarter-on-quarter growth exceeded analysts’ forecasts.
“Our GDP continues to grow, creating more jobs and putting more money in the hands of Brazilians,” Lula, as the leftist president is universally known, wrote on X later on Tuesday.
A 0.9% gain in services, which account for over two-thirds of the Brazilian economy, powered growth in the period. Industrial output gained 0.6% as workers staffed factories and construction sites and labored to meet demands, while agricultural fell 0.9%, the statistics agency said.
What Bloomberg Economics Says
“Another quarter of robust and widespread growth will reinforce the Brazilian central bank’s concerns the economy is overheated and bringing inflation down to the target may require even tighter monetary policy.”
— Adriana Dupita, Brazil and Argentina economist
The momentum, however, is stoking concerns that Latin America’s largest economy is expanding too fast. Rafael Ihara, chief economist at Meraki Capital, described the sentiment among investors as “almost paradoxical.”
“The market tends to see a slowdown as healthy alternative at the moment,” he said.
Swap rates on the contract due in January 2026, an indicator of the market’s outlook toward monetary policy at the end of next year, rose over 20 basis points in morning trading after the stronger-than-expected economic report.
Fiscal Stance
Investors have been ditching local assets over frustrations with fiscal policy that only deepened last week, when the government unveiled a plan to trim 70 billion reais ($11.5 billion) from expenditures over the next two years — well short of expectations.
Disappointment with the plan sparked losses in Brazil’s stock market, while its currency tumbled to the lowest point on record against the dollar.
Analysts worry that Lula’s spend-and-grow recipe for economic progress in reaching its limits. The approach won him praise with constituents and financial markets during his first two terms, but with the nominal budget deficit at 9.5% of GDP in the 12 months through October, investors are demanding that government get public accounts in order.
The deficit is “far too large for an economy at this stage in the cycle,” said William Jackson, Chief Emerging Markets Economist at Capital Economics. “This loose fiscal stance is really supporting GDP growth, but it also suggests it’s unsustainable.”
In the third quarter, demand was fed by by 1.5% expansion in family consumption and a 0.8% increase in government spending.
Price pressures are building at time when the central bank is already lifting the benchmark Selic rate — now at 11.25% — even higher to bring the inflation rate down to its 3% goal. Analysts now expect borrowing costs to stay in the double-digits through the end of 2026.
And while high interest rates have so far failed to significantly dent activity during Lula’s latest term, the outlook is less optimistic for the years ahead.
The central bank’s “tightening cycle will continue over the next few months, likely putting economic activity under renewed strain,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a research note.
--With assistance from Giovanna Serafim, Beatriz Reis and Robert Jameson.
(Adds comments from Lula and economists starting in fourth paragraph)
