What Explains 2023 Growth?
It is becoming increasingly clear that growth in 2023 was not due to increased potential GDP. Despite seducing influential observers, the narrative that Brazil is reaping the benefits of the maturing of past reforms cannot withstand the clear evidence that only actual GDP has been rising, derived from a strong fiscal impulse, including income transfer programs, causing expansion of household consumption.
The consequences of the two hypotheses are diametrically opposed. We start with a brief summary of the last spurt of potential GDP growth, which happened in 2010, when the investment rate at constant prices rose to 21% of GDP, 5 percentage points higher than in the third quarter of 2023. The rest of this Report is dedicated to a detailed analysis of the effects of expansionary fiscal policy and income transfer programs on greater aggregate demand, which produced actual GDP growth of some 3.1% in 2023.
At present, the flow of investments does not cover the capital stock depreciation, and the job market is hovering around full employment, which can be explained by the expansion of demand caused by fiscal policy and by the decline of the participation rate due to the income transfer programs. Larger demand for labor and lower supply due to the decline in the participation rate increase real wages with effects on the services inflation.
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