Brazil's Economy Seen In Soft Landing As Private Spending Cools - Reuters Poll

Brazil's economy is undergoing a soft landing as consumers tighten their purse strings to cope with high indebtedness on post-pandemic purchases and increasing financial costs, a Reuters poll of economists showed.

Economic activity got a boost this year from President Jair Bolsonaro's extra public spending measures aimed at improving his reelection chances before a final runoff vote on Oct. 30 that will decide who wins the top job.

However, Brazilians are now hitting the brakes in the face of rising interest rates on piles of outstanding personal debt, a side effect of the central bank's tough anti-inflation policy stance.

Gross domestic product is set to increase just 0.8% next year compared with 2.7% in 2022, according to median estimates in a sample of 39 economists polled Oct. 4-13. In July, analysts had forecast growth of 0.8% in 2023 and 1.4% this year.

"As monetary policy is kept tight, we see more constrained consumption and investment, combined with weaker external demand, especially in 2023," said Lucas Costa, Latin America economist at Continuum.

Bolsonaro has launched a debt pardon for consumers who splurged when activity normalized after the coronavirus pandemic. His challenger, former President Luiz Inacio Lula da Silva, has also proposed debt forgiveness.

Around 68 million Brazilians were blacklisted by credit score agencies in August due to debt in arrears. State bank Caixa Economica Federal expects to restructure around 1 billion reais ($190 million) in overdue credits.

With prospects for capital spending and foreign trade also under a question mark amid challenging international conditions, investors hope the next administration will renew Brazil's vow of fiscal restraint that Bolsonaro breached ahead of the vote.

WISHING FOR MODERATION

Earlier this month Lula came close to winning in the initial vote, but Bolsonaro outperformed expectations. The former president is currently leading voter preferences for the Oct. 30 runoff by a margin of between 4.6% and 8%, according to two polls.

"Lula's mandate for leftist policies decreased with the closer-than-expected first-round results, while his views will have to moderate further if he wants to attract centrist voters," Amundi analysts wrote in a report.

Elsewhere in the region, Mexico's economy will likely slow next year as well, expanding only 1.2% versus 2.0% in 2022. Yet, contrary to Brazil, where consumer prices are already receding, inflation remains unanchored.

"Weaker growth prospects, gradual normalization of supply chains and lower commodity prices should prove supportive for price dynamics in 2023," said Jose Sanchez, Mexico economist and vice president at HSBC Global Research.

President Andres Manuel Lopez Obrador is implementing some unorthodox steps to help lower food costs through "collaborative efforts" with companies, an approach based partly on voluntary compliance rather than strict intervention.

It pales in comparison to rigid economic controls Argentina's Peronists have put in place since the turn of this century, which have failed nevertheless to avert what has now become the worst cost of living crisis in the Group of 20 major economies.

Argentines facing an inflation rate set to top 100% this year are grappling to make ends meet, while the poorest turn to recycling from garbage dumps or lining up to trade their belongings in barter clubs.

A fresh bout of market instability in July was placated with promises of more austerity measures that helped secure some International Monetary Fund aid but have stirred social protests and further isolated a weakened government.

(For other stories from the Reuters global economic poll:)

($1 = 5.2605 reais)

(Reporting and polling by Gabriel Burin in Buenos Aires; Editing by Ross Finley and Jonathan Oatis)