Brazil likely to be among countries most hindered by China’s slower growth

RIO DE JANEIRO, BRAZIL – Given China’s size, global growth should be affected as a whole, but the Brazilian economy is likely to be one of the most impacted, with the scenario of a poorer performance of the Asian country in the coming years.

The result showed a deceleration in relation to the 18.3% growth in the first quarter, when the annual growth rate was largely favored by the low comparison base with the pandemic-induced drop in the beginning of 2020.

According to Itaú Unibanco’s economists, for each 1 percentage point drop in China’s GDP, the Brazilian GDP shrinks by 0.3 p.p. The bank’s current projection is that the Chinese economy will grow 5.1% next year (compared to the previous estimate of 5.8%). In Brazil, 0.5% growth is projected for 2022.

“Therefore, if the slowdown persists and China grows 4% in 2022, Brazil will only grow 0.2%,” summarizes Itaú Unibanco economist Luka Barbosa. He recalls that commodity-exporting countries, such as Brazil, tend to be greatly impacted by the Chinese slowdown.

Itaú Unibanco economist Laura Pitta adds that China was affected by the impact of the Delta variant on services, which quickly spread throughout the country. “As China has a zero tolerance policy for new Covid-19 cases, the government implemented restrictive measures that had an impact on activity, while other countries were heading toward a situation of coexistence with the virus.”

She recalls that the deceleration process in the Asian country is structural, and that annual growth rates of around 10%, as occurred in the 2000s, came about in a different context, due to a period of strong urbanization in the country. “Today, the growth perspective is of convergence to levels close to those of developed countries. It is difficult to see China growing more than 7% or 8% in the future.”

The global impact of China’s loss of steam is showing and will continue to grow, says Insper economics professor Roberto Dumas Damas. He recalls that the projects to change the country’s energy matrix for cleaner alternatives weighed on the Chinese performance, which led the government to deactivate coal mines, triggering an energy crisis now.

“The crisis is not only in China, but it has worsened Brazil’s recovery plans, with an increase in the prices of Chinese pesticides, which will weigh on food prices in Brazil later on, in addition to the decrease in iron ore exports.”

With a lower dollar inflow into Brazil, the exchange rate should also continue to be pressured, Dumas says. “As we emerge from the worst moment of the pandemic, when the Brazilian economy most needed traction, we are watching that momentum drop, and the Central Bank should continue to have to raise interest rates to fight inflation – these are several factors against our growth next year.”

“The fourth quarter should not be good there either, and the world’s recovery is not proceeding as expected. In Brazil, we are increasingly closer to stagflation,” the professor says.

According to consultant and Brazil’s former Foreign Trade Secretary Welber Barral, the impact of the Chinese slowdown will be primarily on commodity prices. “No one expects China to stop buying from Brazil, but the question is the value. Currently, there is a future price that takes into account their demand, and these prices may continue to drop for other products, as is occurring with iron ore.”

Although Barral believes that agricultural commodities -such as soy and corn- are more protected than mineral commodities, a drop in grain prices could have an important impact on Brazil’s trade balance.

The slowdown of Chinese industry reduces the demand for oil, iron and steel in Brazil, says Rio Bravo economist João Leal. “These commodities lose strength and create downward pressure. Therefore, Brazil may be one of the most affected countries by this loss of Chinese momentum. Regarding agricultural commodities, they should suffer less, although some reduction will eventually occur.”

The second largest economy in the world recovered from the pandemic, but its rebound lost steam due to the drop in industrial activity, lower consumption and deceleration of the real estate sector – with the hardships faced by the real estate giant Evergrande, which has accumulated a debt of over US$300 billion.

According to Iedi (Institute for Industrial Development Studies) economist Rafael Cagnin, the slowdown marks a new chapter for the Chinese economy, which should be characterized by a slightly more modest growth expected since the 2008 crisis.

“Now, what we have is an accumulation of effects. In addition to the energy issue, which caught many off guard, there are growing challenges, like the shortage of some industrial components, such as chips, the issue of debt in the real estate sector, and logistical bottlenecks with containers.”

If China begins to grow less, the demand for Brazilian products will inevitably decrease, says AEB (Brazilian Foreign Trade Association) executive president José Augusto de Castro.

“In this sea of uncertainty, there are two potential positive effects for Brazil: by having to close plants, to offset the energy crisis, China may open space to increase imports of processed products, such as soybean oil and meal, and Brazil could capitalize on this.”

Second, Castro adds that Brazil could benefit from a shift toward the decentralization of global production chains, with industrial production growing in different parts of the world, to reduce dependence on Chinese industry.

Bradesco economist and director of Economics of the CEBC (Brazil-China Business Council), Fabiana D’Atri points out that the main reasons for the Chinese slowdown are due to a government option to control the real estate sector and the country’s serious environmental issues. “There is an option for lower growth, due to the policies that the Chinese government is implementing. In our scenario, we work with growth below 5% in China next year.”

She points out that if the effect of the country’s performance in metallic commodities is evident, in agribusiness commodities the impact is quite different. “It is part of the Chinese government’s plans to strengthen the domestic consumer market and reduce income inequality. Lower Chinese GDP growth should not impact demand for food.”