bool(false)

Worst. GDP. Ever. What does the future hold for Brazil?

. Sep 01, 2020
gdp recession Photo: Andréa Rêgo Barros/PCR

We all knew it would happen, but now it’s official: Brazil is once again in recession. Just a handful of years after barely emerging from its longest economic slump on record, Latin America’s biggest economy finds itself back in the red once more, as a direct result of the coronavirus pandemic. The Brazilian Institute of Geography and Statistics (IBGE) announced GDP fell an eye-watering 9.7 percent in Q2 2020 — just above market expectations but still the worst quarterly result ever recorded.

Elsewhere, industry shrank 12.3 percent in the three months ending in June, followed by a 9.7 percent drop in the crucial services sector. Agriculture was the sole silver lining, rising 0.4 percent in comparison to Q1.

</p> <div class="flourish-embed flourish-chart" data-src="visualisation/2652850"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>However, these disappointing results reflect the eye of the Covid-19 storm, from which economists consulted by <strong>The Brazilian Report</strong> believe the country is emerging.</p> <p>&#8220;The result could actually have been much worse and the Brazilian economy is recovering faster than expected,&#8221; says Sergio Vale, chief economist at MB Associados. &#8220;That makes room for a lower-than-expected yearly drop.&#8221; Mr. Vale revised his yearly GDP predictions from a 6-percent contraction to 4.8 percent after today&#8217;s announcement.</p> <p>Indeed, entering into recession had already been priced into the local market, and the benchmark stock index Ibovespa largely ignored the IBGE&#8217;s announcement, focusing instead on promises by President Jair Bolsonaro and Economy Minister Paulo Guedes to submit a public service reform by the end of the week.</p> <p>Furthermore, the GDP figures come one day after the government submitted a miserly budget proposal for 2020, boosting investors who feared Brazil may break with public spending rules and increase its debt. By noon on Tuesday, Ibovespa had risen 2.2 percent.</p> <p>&#8220;The GDP result was already expected,&#8221; says Marco Harbich, a strategist at Terra Investimentos and columnist at <strong>The Brazilian Report</strong>. &#8220;What matters from now on is the [government&#8217;s] commitment toward balancing the public accounts.&#8221;</p> <div class="flourish-embed flourish-chart" data-src="visualisation/2653072"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <div class="flourish-embed flourish-chart" data-src="visualisation/2653189"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>Silver linings</h2> <p>As is often the case during Brazilian economic hardship, agribusiness stood as the solitary bright spot in a disappointing Q2 performance. The sector grew 1.2 percent year-over-year off the back of booming harvests, lower forex rates, and increasing demand. Mr. Vale adds that the Brazilian economy is highly dependent on commodities, meaning the positive momentum for the sector creates more dynamism for the entire agribusiness chain.</p> <p>Lower interest rates, meanwhile, have created the conditions for resilience in the construction industry. In Q2, it saw a drop of 5.7 percent, which, while steep, far outperformed industry as a whole. Meanwhile, real estate activities rose 0.5 percent in Q2, corroborating this tentatively positive outlook, says Lucas Carvalho, an analyst at Toro Investimentos.</p> <p>&#8220;As civil construction is a labor-intensive sector, this shows the possibility of faster recovery than previously expected,&#8221; he says.</p> <p>Economists unanimously point toward the importance of the government&#8217;s emergency coronavirus aid program in preventing an even more severe drop in consumption. The BRL 600 (USD 112) <a href="https://brazilian.report/power/2020/08/20/what-happens-when-brazils-coronavirus-emergency-aid-ends/">monthly payments</a> have become increasingly important in the revenue of Brazilian families; in July, the entire amount paid out by the federal government in benefits surpassed the salary losses suffered due to the pandemic.</p> <p>Therefore, despite plans to reduce the monthly stipends to BRL 300, continuing the program until the end of the year will help support the economy in the coming months.</p> <h2>Recovery prospects</h2> <p>Since 2017, Brazil&#8217;s fragile recovery has been sustained by family consumption. Thus, the reduction to emergency aid and the weak job market spell trouble ahead. GDP figures showed proof of growing insecurity, as families&#8217; saving ratio jumped to 15.5 percent ahead of 13.7 percent last year.</p> <p>According to economists, Brazil is now faced with the task of fostering investments in order to survive, but the prospects are challenging. In the quarter, the investment rate fell to 15 percent, versus 15.3 percent a year before. Gross fixed capital formation — another important bellwether for investments in the productive sector — fell 15.2 percent in the same comparison.&nbsp;</p> <p>It is unlikely that such a boost will come from the government. As seen in the budget proposal delivered to Congress yesterday, the federal administration will only have BRL 96 billion available for discretionary expenses in 2021, which includes investments.</p> <iframe src="https://open.spotify.com/embed-podcast/episode/6ZZeH86TSqcGeZOmJuf8ah" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <p>Such a scenario highlights the dire need for reform. “I believe that approving reforms will allow the government to increase investments. Reforms are essential to bringing growth back,” says Mr. Harbich.&nbsp;</p> <p>Mr. Carvalho believes that a reform of Brazil&#8217;s tax system would be especially important to attract both domestic and foreign investments, having a positive impact on industry and services. However, that depends on the ability of the Jair Bolsonaro administration to deliver the reforms on time.&nbsp;&nbsp;</p> <p>“The Economy Minister has promised to deliver reforms several times and now he’s overwhelming Congress with proposals that delay the process. Moreover, those are too complex discussions for online votes, and this is an electoral year,” highlights Mr. Vale. “The unstable macroeconomic environment will be more evident in 2021, especially with a government that is increasingly focused on elections and underperforming in the economy.”

Read the full story NOW!

 
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.

Our content is protected by copyright. Want to republish The Brazilian Report? Email us at contact@brazilian.report