Commodity Prices and Brazilian Economic Growth

Commodity Prices and Brazilian Economic Growth

By Tiago Piassum* and Cristiano Oliveira

The Economic Activity Index of the Central Bank of Brazil (IBC-Br), a preliminary GDP indicator, surprised the market with a 0.80% growth in September compared to the previous month. The January 2024 Boletim Focus projections had predicted growth of only 1.6% for the year. Still, it forecasts a slightly higher figure than the 3.00% accumulated over the past 12 months.

But how is this possible in an environment of instability, with weakened credibility in fiscal and monetary policies, and rising exchange rates and future interest rates? For many, the current scenario should already be pointing toward a recession. So why hasn’t it happened yet?

Monetary Policy Lag and Economic Impact

First, the full impact of the Selic interest rate hike is only expected to hit the economy in 2025 due to the gradual nature of monetary policy transmission. When the Central Bank raises the Selic rate, it triggers a chain reaction that affects borrowing costs, consumer behavior, business investments, and inflation expectations. These effects take time to unfold, as they depend on financial contract adjustments, market dynamics, and shifts in economic behavior.

Higher interest rates directly increase borrowing costs for businesses and consumers. For companies, this typically leads to reduced investments since the higher cost of capital makes expansion projects less attractive. Households, in turn, face higher monthly payments on credit cards, loans, and mortgages, which reduces discretionary spending. However, many existing financial commitments are based on fixed rates or long-term agreements, meaning the impact of rate hikes is not immediately felt but rather materializes as contracts are renegotiated or new ones are signed.

The process is even slower as businesses and consumers adjust their expectations and behaviors. Decisions to cut investments or reduce spending usually happen gradually as firms and households assess the broader economic landscape. Empirical evidence suggests that the strongest effects of monetary policy changes on economic output typically take 12 to 24 months to materialize. In the case of recent Selic rate hikes, their full influence on production, employment, and consumption is expected to become more evident by 2025.

The Influence of Commodity Prices on Brazil’s Economic Growth

Second, the potential for an economic crisis may be delayed due to the strong influence of international commodity prices on Brazil’s short-term growth. Since 2004, the correlation between the IBC-Br and the World Bank’s commodity price index has been approximately 66%. Historically, crises such as the 2008 financial crisis, the Dilma Rousseff administration, and the COVID-19 pandemic have been accompanied by commodity price declines. Although correlation does not imply causation, Brazil, as a small open economy, appears to experience a direct relationship between commodity cycles and its own economic cycle.

Many still believe that commodity influence is limited to the trade balance, but its impact is far more extensive. When commodity prices are high, domestic demand strengthens, while during downturns, domestic demand contracts. Some studies suggest that commodity price shocks affect investment and consumption even more intensely than exports. As a result, Brazilian GDP is highly influenced by global commodity price movements: when they rise, Brazil grows; when they fall, the country faces economic downturns.

The surprising growth figures of 2024 seem to reflect a slight recovery in commodity prices after a post-pandemic decline. This keeps Brazil temporarily away from an imminent economic crisis—something that appears more a matter of luck than strategic planning, especially given uncertainties surrounding fiscal and monetary policies.

However, without a solid regulatory and fiscal policy effort that stimulates production from the supply side (reducing current interventionism), all the ingredients for a crisis remain in place. A decline in commodity prices may be the final trigger for such a downturn.