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Lowest GDP growth in three years highlights Brazil’s dire need for reforms

. Mar 04, 2020
Lowest GDP growth in three years highlights Brazil's dire need for reforms Photo: Yuriy Boyko/Shutterstock

The Brazilian economy posted 1.1 percent GDP growth in 2019—the worst performance since the country dug itself out of recession in 2017. While the numbers hardly came as a surprise, they were far below the initial median forecasts of 2 percent growth. This means that despite Congress passing labor and tax reforms in 2017 and 2019, the economy is still languishing at 2013 levels.

So, how can Brazil return to the path of true economic growth?

</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1404881"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>For economists, the answer is more reform. Data published by Brazil&#8217;s official statistics bureau indicate a very modest yet steady growth quarter after quarter, which would be consistent with a recovering economy. Growth was once again propelled by a 1.3-percent bump in two sectors: services and agribusiness, though the latter had its smallest growth in three years.</p> <p>Industry rose a paltry 0.5 percent, but that could be considered as some good news given the 1.1-percent contraction in extractive industries, which plummeted in the aftermath of the <a href="https://brazilian.report/environment/2020/01/25/one-year-brumadinho-mining-disaster-justice/">Brumadinho dam collapse</a> in January 2019.</p> <p>The government slashed public spending by 0.4 percent, in line with austerity measures, a trend that is set to continue.</p> <p>Meanwhile, exports fell 2.5 percent in the year amid a more challenging international scenario. Sérgio Vale, chief-economist at MB Associados, predicts that Brazil&#8217;s future growth will rely on private consumption and investments—which increased to 15.4 percent of the GDP, the highest share since 2016. Notwithstanding, the government must work to pass a tax reform, to ensure confidence in the economy and increase productivity.&nbsp;</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1506261"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>“Reforms are the key element to continue growing in the future. The government must improve its ability to form coalitions, focus on the <a href="https://brazilian.report/newsletters/brazil-daily/2020/02/20/brazilian-congress-tax-reform-cid-gomes-shot-police-strike/">tax reform</a>, and conclude the approval of the new rules for the sanitation sector,” Mr. Vale told <strong>The Brazilian Report</strong>.</p> <p>He added that with 2020 being an electoral year, the legislative calendar is not in Jair Bolsonaro&#8217;s favor. The government is aware of this, with Economy Minister Paulo Guedes claiming the administration has &#8220;15 weeks to change Brazil,&#8221; after which Congress will turn their attentions to the municipal elections to be held in October.</p> <p>But while there is some goodwill in Congress for the government&#8217;s agenda, President Bolsonaro&#8217;s political skills appear to be getting worse. After the GDP data was published, Mr. Bolsonaro brought a comedian dressed as the president to stand in his place during a press briefing. The president refused to answer questions about the growth results, while the comedian handed out bananas to the reporters in attendance.</p> <figure class="wp-block-image"><img src="https://brazilian.report/wp-content/uploads/2020/03/comedian-bolsonaro.jpg" alt="comedian bolsonaro" class="wp-image-32382" srcset="https://brazilian.report/wp-content/uploads/2020/03/comedian-bolsonaro.jpg 800w, https://brazilian.report/wp-content/uploads/2020/03/comedian-bolsonaro-300x168.jpg 300w, https://brazilian.report/wp-content/uploads/2020/03/comedian-bolsonaro-768x429.jpg 768w, https://brazilian.report/wp-content/uploads/2020/03/comedian-bolsonaro-610x341.jpg 610w" sizes="(max-width: 800px) 100vw, 800px" /><figcaption>On March 4, Jair Bolsonaro brought a comedian to face reporters in his place. Photo: Twitter</figcaption></figure> <h2>What to expect for 2020?</h2> <p>In an interview with <a href="https://br.reuters.com/article/businessNews/idBRKBN20R1Y8-OBRBS"><em>Reuters</em></a>, Economic Policy Secretary Adolfo Sachsida said the government will reduce its 2.4-percent GDP growth estimate for the year due to the economic unrest caused by the coronavirus outbreak, but these forecasts would “not drop below 2 percent,” said Mr. Sachsida.</p> <p>At the end of last year, the <a href="https://twitter.com/ASachsida/status/1212065528472358912">secretary tweeted </a>that he would wager a steakhouse lunch that Brazil&#8217;s GDP would grow 2.5 percent or more in 2020.</p> <p>Banks and brokerage firms jumped the gun yesterday and cut down their own GDP forecasts for the country, as we explained in our <a href="https://brazilian.report/newsletters/brazil-daily/2020/03/04/coronavirus-slash-brazilian-growth-forecasts-latin-america-budget/">March 4 Daily Briefing</a>.&nbsp;</p> <p>Mr. Vale, who himself predicts GDP growth of 1.7 percent this year, believes the Brazilian economy will improve in 2020, but from such a low baseline, modest growth “is not enough.” In his view, the first half of the year will have poorer results <a href="https://brazilian.report/newsletters/brazil-daily/2020/02/07/coronavirus-industry-5g-auction-bolsonaro-cabinet/">due to the coronavirus outbreak</a>, but important sectors will have a chance to recover.&nbsp;</p> <p>“We are expecting a record harvest for 2020 and livestock should perform well too. Of course it tends to be affected by delays in exports to China, but they will need to feed themselves somehow,” he said. “Also, real estate is a highlight and is set to benefit from the low interest rates scenario. Vehicle sales are doing O.K., as is the oil and gas sector. But nothing too vigorous.”

 
Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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