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Brazil’s economy entered negative territory in Q3; What’s next for BRL?

Brazil's economy entered negative territory in Q3. What’s next for BRL?

Brazil‘s Economic Activity Index (IBC-Br) fell 0.06% in September after a revised 0.81% decline in August. The data missed analysts’ expectations of a 0.20% increase and raised some financial alerts, fearing a recession.

Essentially, the IBC-Br “reflects the activities of industry, services, and agriculture,” according to Brazil’s central bank, the index manager. Many analysts consider it a forecast of the country’s GDP, which usually presents different raw results but within similar behavior.

Compared to September 2022, the monthly IBC-Br rose 0.32% while also growing by 0.78% from the same quarter last year (Q3 2022). However, Q3 2023 current results showed a drop of 0.64% from the previous quarter (Q2 2023).

With the data released on November 17, the IBC-Br has accumulated growth of 2.77% in the year and 2.50% in 12 months.

Notably, the index has trended upward since 2016, with a pullback in 2020 that was quickly recovered from 2021 to early 2022. Nevertheless, economists fear a major trend reversal could be brewing after the recent negative results.

IBC-Br - Economic activity, 12-month % changes. Source: Brazil’s Central Bank
IBC-Br – Economic activity, 12-month % changes. Source: Brazil’s Central Bank

Estimations, revisions, and opinions on Brazil’s economy

As reported by Reuters:

“Finance Minister Fernando Haddad had already been drawing attention to a “very poor” third quarter, attributing it to high borrowing costs and declining commodity prices compared to the same period last year, factors impacting corporate performance and, consequently, tax revenue.”

— Reuters

Moreover, Nicolas Borsoi, an economist at Nova Futura, attributed this recent fall to meaningful losses in the service sector, which accounts for 70% of the country’s activity. Borsoi also commented on his previous forecast.

“There is now a downward bias to our forecast of a 0.2% GDP drop in the third quarter. My perception is that the fourth quarter will be even worse. For now we’re sticking to our 3% growth forecast for the year, but 2.8% seems likely as well.”

— Nicolas Borsoi

The U.S. Dollar (USD) against the Brazilian Real (BRL)

The Economic Activity Index by the Central Bank of Brazil creates more challenges for the country’s economy and its local currency performance in the forex market

Particularly observed in the chart of the U.S. Dollar (USD) against the Brazilian Real (BRL). The USD is trading at R$4.90 per dollar after testing strong price support at the R$4.85 zone for the fifth time since August.

ICE: USD/BRL 4-hour price chart.
ICE: USD/BRL 4-hour price chart. Source: TradingView

In this context, economic activities can take another major hit in the following months if the reform tax bill gets approved. As reported by Finbold on November 11, Brazil is on track for the world’s highest VAT.

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