Companies should expect ongoing disruptions to their businesses in Rio Grande do Sul in coming weeks as adverse climate conditions show no signs of abating. While the true economic impacts of the floods will be closely tied to the pace of recovery, companies should expect the bulk of negative economic performance to be concentrated in Q2, with gradual normalization in H2 2024 and minimal spillover into 2025. Higher transportation and food costs will likely exert pressure on companies’ COGS; multinationals should seek to diversify supply chains to mitigate the risk of disruptions. In the long run, firms should also seek to identify their supply chain exposure to adverse climate events.
Overview
Heavy rain and flood conditions in Brazil’s southernmost state of Rio Grande do Sul (RS) persist, exacerbating one of the country’s worst natural disasters, which has killed over 100 people and displaced more than 500,000 from their homes. Rio Grande do Sul is Brazil’s fourth-largest economy, behind only São Paulo, Rio de Janeiro, and Minas Gerais. The state is expected to register record losses, mainly in Q2, and see normalization in subsequent quarters. Activities related to agriculture and manufacturing are expected to be the most impacted at the national level, given their greater significance to the state’s GDP compared to the national GDP composition. In manufacturing, a survey by the Federation of Industries of the state of Rio Grande do Sul (Fiergs) shows that nine out of ten manufacturing companies are located in cities experiencing rain and flooding conditions, disrupting the vast majority of the sector’s gross value added. On the agricultural front, disruptions will be less severe, given that over 80% of the state’s harvests for this year have already been collected and the provisional measure to import over 100,000 tons of rice to avoid price increases amid shortage speculation was implemented. On May 9, Brazil’s President Lula da Silva decreed a package of measures that will provide BRL 50.9 billion in funding to address the aftermath of the heavy storms, with most measures focused on credit initiatives, but also including extra funds for existing social welfare programs such as Bolsa Família.
Our View
While data on the magnitude of the impact remains relatively slim, we expect that the crisis conditions in Rio Grande do Sul will have implications for underlying growth dynamics, inflation, and government spending trends.
- Growth: For 2024, we maintain our growth forecast of 1.9% for now, awaiting greater clarity on the extent of the destruction caused by the ongoing floods in the south. The magnitude of the impact will depend on how long it takes to normalize operations in companies and distribution flows, which is quite uncertain at the moment. However, preliminary analysis suggests that the floods could dampen national GDP by 0.2–0.3 percentage points. Overall, stronger-than-expected growth in Q1 will help compensate for weaker Q2 growth dynamics, leaving our GDP forecasts unchanged for the time being.
- Inflation: Harvest losses and infrastructure damage are expected to cause an increase in the cost of cargo transportation, which in turn makes final products more expensive. The country’s southernmost state holds significant importance in the production of rice, meat, and poultry. Food prices are expected to rise sharply in May and June but should then normalize in the coming months. As a result, FrontierView has made mild adjustments to its 2024 inflation forecasts from 4.0% to 4.1%, with limited spillover into 2025 (still forecasted at 3.7%).
- Government Spending: While the relief efforts outlined for Rio Grande do Sul will fall outside of the current fiscal framework, they will exert additional pressure on Brazil’s fiscal outlook. So far, the measures announced by the federal government have totaled BRL 62 billion, and more measures are expected to follow, with total support measures expected to cost between 0.6% and 1% of GDP.
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