V, U, L or W: The shape of Brazil’s economic recovery

Back in 2015, when Brazil was already one year into an economic slowdown, a question started popping up among economists: what will be the shape of this recession? The inquiry was somewhat of a metaphor. What people were actually wondering was how long the downward trend would last, when recovery would start and how strong it would be.

Looking back, part of the answers are given: the recession officially lasted for 11 quarters, until the end of 2016. Gross Domestic Product (GDP) shrank 3.5 percent in 2015 and 3.3 percent in 2016, according to recently revised figures by the national statistics agency, IBGE. The upward trend began in 2017 when the country posted a 1 percent growth.

Now, fresh data and clearer perspectives about what is to come allow for a more precise answer to the original question: what will Brazil’s economic recovery look like?

Not a “V”

The most optimistic scenario would be a V-shaped recession. That means that despite a sharp decline in economic activity, things would be back on track promptly. In these situations, the recovery takes about as long as the economic decline itself.

A perfect example is the effect of the financial crisis on the global economy a decade ago. After a 1.7 percent drop in 2008, world GDP grew 4.3 percent in 2009, virtually the same 4.2 percent rate recorded in 2007. Looking at the chart, it forms a perfect “V.”

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Brazil rehearsed a similar quick comeback. At the beginning of 2016, confidence indexes showed that both businessmen and consumers were more optimistic about the future. The political scenario, however, wrecked any chance of a meaningful recovery. The impeachment process of former President Rousseff spread uncertainty, delayed investments and postponed the economic pickup.

Maybe a “U”?

Instead of a surge in activity, the Brazilian economy remained in negative territory in 2016. A drop in the GDP for a second consecutive year suggested the recession could look more like a “U,” meaning that the improvement process would take longer to start but that it could still be a robust one.

That does not seem to be the case, though. Brazil is experiencing...