Investment drops 3.5% and remains below the Latin American average

Investment in the Brazilian economy decreased by 3.5% in the first quarter, compared to the last quarter of 2021. As a result, it came to represent the equivalent of 18.7% of GDP (Gross Domestic Product), down from 19.2% recorded in December, according to data released this Thursday (2) by the IBGE (National Institute of Geography and Statistics. In comparison with the first quarter of last year, investments in the Brazilian economy fell by 7.2%, after five consecutive quarters of growth.

As a result, the volume of investments in the economy in relation to the size of GDP worsened in comparison with the average verified in Latin America and in emerging countries. It is a sign that Brazil urgently needs to improve this indicator to accelerate economic development again, economists say.

In the accumulated in four quarters, the indicator managed to maintain a positive variation of 10.1%.

The problem, say analysts interviewed by the UOLis that the country will face an even more adverse economic scenario in the rest of this year to attract investments.

The level of investment in Brazil is far below what is necessary to sustain growth. Our level is pretty low by international standards. There is no way to fully shield ourselves from adverse factors arising from the international economy, but we can devise strategies that make us less vulnerable to them.
Antonio CorrĂȘa de Lacerda, coordinator of the postgraduate course in Political Economy at PUC-SP and president of the Federal Council of Economics

Importance of investments in the economy

Investment in the economy is measured by the IBGE through the calculation of the Gross Formation of Fixed Capital (GFCF), which gathers everything that is invested to expand the economy’s production capacity. This applies to projects for the expansion or construction of new factories, roads, as well as ports, airports, mines or oil platforms, for example, promoted by both the private sector and governments.

It is through these investments made today that the country can, in the future, produce more, open new jobs and, thus, generate more wealth.

Share of investment in GDP, according to IBGE:

  • 2010: 20.5%
  • 2011: 20.6%
  • 2012: 20.7%
  • 2013: 20.9%
  • 2014: 19.9%
  • 2015: 17.8%
  • 2016: 15.5%
  • 2017: 14.6%
  • 2018: 15.1%
  • 2019: 15.5%
  • 2020: 16.6%
  • 2021: 19.2%
  • 2022: 18.7% (1st quarter)

What influenced investment in the first quarter

In the first quarter, investment in the economy was affected by the fall in domestic production and imports of capital goods. According to economists, some factors are affecting the indicator:

Weaker economic recovery: The reopening of the economy after periods of restrictions due to the pandemic helped GDP to grow 1% in the first quarter, but less than expected by economists, who were projecting a 1.5% advance.

infrastructure projects: The progress of the public concession program agenda, with the holding of auctions for railways, ports and airports, is still not generating strong investments in these sectors, say industry economists. According to the Ministry of Infrastructure, since 2019, 83 assets have been auctioned and approximately R$100 billion in private investments in transport have been contracted, but many of these investments are scheduled for the second half or 2023.

internal savings: To invest more, a country needs foreign capital, or increase domestic savings. The IBGE did not disclose the savings rate in this first quarter, due to lack of data, which should be collected by the Central Bank. But the savings rate at the end of 2021 was 17.4%, therefore below the investment rate itself.

The increase in domestic savings in the Brazilian GDP in 2021, from 16.6% to 17.4%, was the result of interest rates, which started the year at historic lows. But the base rate began to rise, affecting the ability of economic agents to save.

This affected the migration of resources, which were in government bonds, without stimulating the real economy, to the real economy, through investments in shares of companies on the Stock Exchange, in real estate funds and other investment funds that inject capital into new projects.

Investment even lower than the world average

Investments in the Brazilian economy have been recovering since 2017, when this indicator reached an all-time low of 14.6%. But Brazil remained below the average recorded in the world, among emerging countries and even within Latin America, according to a study by the Brazilian Institute of Economics, of the Getulio Vargas Foundation (Ibre/FGV).

A situation that worsened after the first quarter of 2022.

Average investment in relation to GDP:

  • World: 27.3%
  • industrialized countries: 22.9%
  • emerging countries: 33.2%
  • Latin America/Caribbean: 20.5%
  • Brazil: 18.7%

According to economists, the period of economic recession, between 2014 and 2017, impacted domestic savings and took away the country’s competitiveness to attract foreign resources.

As of 2017, the approval of the spending ceiling and better control of public accounts helped to reduce inflation, opening space for interest rates to fall, which fell from 14.25% to 6.5% by 2019.

Then came the pandemic, which affected economic activity. The level of investment even increased in 2020 and 2021. But that was because it was the GDP that decreased – and not because investments increased.

Companies that survived the crisis became stronger to invest. The low interest rate scenario led the private sector to invest more. The spending ceiling held back public sector spending in the economy and made room for the private sector. Then came the pandemic, which interrupted this movement.
Gino Olivares, chief economist at azimut Brazil wealth Management

challenges ahead

The resumption of the increase in the share of investments in GDP is essential for the country to be able to sustain a rhythm of economic growth for more quarters, say economists. The problem, point out experts heard by the UOLis that the economic environment will be more difficult in the second half.

And, therefore, both GDP and the volume of investments should stagnate at current levels. The main reasons for this pessimistic expectation are:

high interest: Rising inflation caused by the price of oil and commodities led central banks around the world to raise interest rates. In Brazil, the basic Selic rate has already reached its highest level in half a decade.

This interest rate increase in Brazil will begin to have a stronger effect on economic activity in the second half of the year, affecting household consumption and the ability of companies to invest in new projects.
Felipe Sichel, chief economist at Modal bank

elections: Elections bring uncertainty regarding the economic policy of the next government, be it reelection or the inauguration of a new president.

Uncertainty is not good for investments. So I don’t see a positive scenario for investment growth in the second half of the year.
Christiano Arrigoni, professor and economist at Ibmec

How much investment does Brazil need to grow?

According to studies by the Brazilian Association of Infrastructure and Basic Industries (Abdib), the Brazilian economy would have to invest, just in infrastructure, the equivalent of 4.3% of GDP, but currently applies 1.7% of GDP.

Without increased investment in infrastructure, total investments are unlikely to grow much above 20% of GDP, economists say.

If the growth of domestic demand, represented here by household consumption, is not accompanied by productive investments, the capacity of national production to meet national demand is compromised.
Carla Argenta, Chief Economist at CM Capital

And the investment rate to GDP needs to be at least around 20% so that potential growth doesn’t drop so much.
Christiano Arrigoni, professor and economist at Ibmec

Brazil needs to be in better conditions than those countries that compete with us for global investments. And, in this group, we have Russia, Mexico, South Africa, some Eastern European countries, like Poland, and some Asian economies, excluding China.
Gino Olivares, Chief Economist at Azimut Brasil Wealth Management

What motivates the investments are two factors: expected growth in demand; and expectation of return, or profit, what we economists we call marginal return on capital. Thus, the biggest obstacles are precisely the lack of perspective regarding both factors mentioned, in addition to the lack of clarity of the development project.
Antonio CorrĂȘa de Lacerda, Coordinator of the Graduate Program in Political Economy at PUCSP and president of the Federal Economic Council