Flavio Maluf, one of Brazil’s leading entrepreneurs and investors, has reported that several indicators of economic activity are declining in agricultural sectors. Mr. Maluf is an expert on matters related to business practices in Latin America. He is also knowledgable about global economic trends related to investment patterns and policy decisions by the World Bank and the International Monetary Fund.
In 2017, Flavio Maluf used his understanding of microeconomics and macroeconomics to predict the trajectory of the Brazilian economy. Recent government data about the agricultural sectors of the Brazilian economy reveal that Maluf correctly predicted a sluggish period of growth in the early months of 2018. It is useful to explore the definition of GDP before examining Maluf’s revelations in greater detail.
What is GDP?
Aside from stock market prices, gross domestic product is one of the most talked about economic indicators in non-economist circles. Many people understand that GDP is a measure of general economic activity, but they often do not know the components of the GDP account. By understanding how GDP is recorded, you will understand that not all GDP growth is desirable. Likewise, not all GDP shocks are poor for the long-run economic outlook.
There are four major components of the gross domestic product account. The measurement methodology may vary across countries, but the components are always private consumption, business investments, government expenditures, and net exports. Net exports are calculated by subtracting imports from exports. Since GDP is a simple equation, increases in the indicator should be intuitive. Increases in any of the components can lead to an overall increase in economic activity.
GDP is a measure of all output within the borders of a country within a single year. Brazilian GDP does not include the sales of Brazilian factories located in China. It also does not include the sale of goods produced from previous years. This definition of GDP illustrates several key points. GDP is a suitable way of observing new economic activity each year. However, it is a poor measure of all economic activity since underground sectors and resale markets are not included in the gross domestic product accounts.
It is important to note that rising GDP does not necessarily imply that the long-run health of the economy is improving. Assume that government expenditures dramatically increase while other components of GDP remain constant. GDP increases in the short-run, but it does not reveal a long-run trend. Due to the high government expenditures, the limited financial resources are diminished for the private sectors. This situation leads to declining business investments. Declining business investments eventually lead to falling employment and reinvestment in physical capital resources. Private consumption falls as a result of reduced productivity across economy. The initial boost in GDP causes an overall decline in economic activity in the long-run.
Many political pundits often argue that a high volume of imports is poor for the economy. It is true that high imports reduce GDP when you are considering a short-run time horizon, but the economy is not necessarily weaker when imports exceed exports. The deficits are no longer a problem when long-run investment and consumption trends enter the equation.
It should now be clear that it is unwise to use GDP as the sole indicator of economic health in a country. You should consider multiple time horizons to understand the total effect of changes in GDP.
Flavio Maluf’s Thoughts on Falling Agricultural GDP in Brazil
The Brazilian economy grew by .4 percent in the first quarter of 2018. This figure is the typical quarterly growth rate of an advanced economy, but it is sluggish for Brazil. Between January and March, the GDP of the agricultural sector fell by 2.6 percent. This is a large shock that was largely unexpected. Economists are still attempting to understand the underlying causes of this poor economic performance.
Between April and June, poor GDP growth continued due to supply chain disruptions. Brazil experienced major labor strikes from drivers in the transportation sector. Spurred by regulatory concerns and falling diesel prices, these strikes disproportionately affected the agriculture sector by interrupting the supply chains. The shocks from this event will likely affect the agricultural output for the entire year.
Maluf has argued that the driver strike occurred at one of the most critical moments for the Brazilian economy. 20 percent of sugar production occurs during the early months of summer. 33 percent of maize production occurs during the same period. Sugar and maize are major inputs used by businesses across the Brazilian economy.
Low maize production has caused shocks in the livestock sector. Due to a low supply and high demand of cattle feed, high prices are forcing producers of beef and dairy to reduce output. Some production centers in Center-South Brazil have completely halted production. The driver strike also reduced coffee production. Coffee and beef are among Brazil’s top exports, so it is not surprising that agricultural GDP is low.
While the low output of the Brazilian agricultural sector are unfortunate, the situation is better than expected. GDP is currently propped up by a unusually large soybean output. In the first quarter of 2018, farmers sold 119 million tons of soybeans. This figure is 61 percent of Brazil’s typical annual soybean output.
A government response to agricultural troubles in Brazil is not expected, but the problem is expected to worsen in the third quarter before economic indicators finally increase.