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.”


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


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 its slowest recovery in history. Economist Silvia Matos, who is a professor and researcher at the Brazilian Institute of Economy at Fundação Getulio Vargas (IBRE/FGV) compared the current economic performance with the pace recorded after the other two longest recessions in Brazil’s history, from 1981 to 1983 and from 1989 to 1992.

“These recessions are comparable not only because of their length—nine quarters in the early 1980s and 11 quarters in the early 1990s and now—but also because they are related to more complex structural problems and political uncertainties,” she highlights.

Ms. Matos points out that at the current stage, seven quarters into the recovery period, the economy had already made up for all the losses in the past two long recessions. “By this time, in the early 1980s, the economy had grown 9.3 percent after falling 8.5 percent, and in the early 1990s it had had an increase of 8.6 percent after a 7.7 percent drop”, she notes.

This time, after a drop of 8.1 percent, the Brazilian economy has expanded only 3.3 percent over the same period. To fill in the gap and get back to the pre-crisis level, the country still needs to gain another 4.8 percent, Ms. Matos’ calculations show.


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


In terms of pace, in past recessions, quarterly increases averaged 1.3 percent. Now, that is what Brazil is expected to grow over the whole year of 2018. Ms. Matos lists three main reasons behind such a slow expansion.

The first is significant fiscal imbalances. The policy of boosting the economy after the 2008 financial crisis via public investment and subsidized credit led to a spike in the country’s debt and eventually backfired. “To counter the problems caused by that, the monetary policy kept interest rates high in real terms despite the magnitude of the recession,” she points out.

As Ms. Matos explains, in a regular crisis, central banks normally cut interest rates to support economic activity. In the Brazilian scenario, with concerns regarding high levels of inflation, for instance, interest rates remained high and limited the potential for recovery. “Even with the current low inflation and lower interest rates, Brazil still does not have a solid macroeconomic balance,” she warns.

The second reason has to do with the “credit boom” which sustained growth over the period preceding the recession. When the downturn hit, families and companies saw their bills pile up and high interest rates made matters worse. “These economic agents firstly had to figure out their budgets before thinking about consumption or investment, which could have played a positive role for the economic expansion,” the FGV researcher explains.

The third point on Ms. Matos list is inefficiencies at the micro level, which act like drains for potential positive effects on the economy. “There is a major issue related to the inefficiency of the investments in Brazil, investments in infrastructure, for instance,” she adds, explaining that despite large sums of money being direct to subsidize specific sectors of the economy, for instance, the results were not satisfactory.

And investments are just one among several components of the GDP that are still struggling to make a comeback. The industry, construction, and retail sectors are also underperforming in comparison to GDP.


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


“Some of these components started a downward trend even before the recession officially started. So the combined losses are even more significant if you take that into account,” Ms. Matos explains.

As the underwhelming performance of the Brazilian economy persists, it becomes clear that a U-form cannot be formed. The second “leg” of the chart, representing the pickup in activity, will be much less inclined than the first. That is, if the decline in economic activity lasted for 11 quarters, it will take far longer for it to return to the same level.

What shape then?

“The recovery will look like an ‘L’, with a slightly raised second leg,” says economist Alessandra Ribeiro, from consultancy Tendências. She expects the recovery to be moderate and gradual.

Ms. Ribeiro estimates that the GDP will only get back to 2014 levels between 2021 and 2022. That means that it will take about five years to make up for the almost three years of recession. By her figures, recovery is taking place at half the pace of the downturn cycle.

Thais Zara, chief economist at Rosenberg Associados, notes that this “slower than usual” pace was somehow expected. “This recovery is taking place alongside a fiscal adjustment,” she says, in reference to the federal government’s efforts to balance its budget.

The cuts in investments within this process is a constraint factor for potential growth, the economist explains. “The recovery may look like a square root sign, since the second leg, going up, is less inclined than the first one.”

Juan Jensen, an economist at 4E consultancy and member of the advisory board at Brazil’s Development bank BNDES, also sees this as a “very different” recovery in comparison with previous ones.

“In political terms, what came out of the ballot is a continuity of the reformist agenda which may continue but in a gradual and non-linear form,” he says about the election of Jair Bolsonaro under a liberal platform.

Mr. Jensen highlights that there still is a lot of uncertainty regarding the articulation capabilities of the new administration in Congress what may represent bumps in the road for the country’s economy. “There may be progress in specific topics, but not in everything,” he projects.

Thinking of a shape, the economist has a similar figure in mind. “It is not a ‘V’ nor a proper ‘L’,” he says. “It can be an ‘L’, with its leg a bit inclined.”


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


Performance over the next years will certainly not be a stable straight line all the way up, but this chart gives a sense of what trend to expect. Although there are some caveats and conditions for these forecasts to come true, as of now there are no major concerns that Brazil could slide back into a deep recession anytime soon.

Not a ‘W’ – for now

Ms. Zara argues that for sustained improvement to take place over the next years, it is mandatory that the reform agenda advances in Congress. “It will be necessary to see some progress in that sense in the first semester of 2019 so the improvement in confidence can translate into a betterment of financial conditions,” she adds.

The chief economist at Rosenberg Associados highlights that some components to boost the economy are already laid out. Low levels of inflation, which is at 4 percent in annual terms, for instance, may help keep interest rates down for a longer period of time. This would favor bank lendings and indirectly support families’ consumption and the deleveraging of companies, she explains.

Ms. Matos agrees that structural problems must be addressed via “significant reforms to the Brazilian state” and that a way to face the current problems is by increasing productivity. “There are tax reforms, regulatory changes, reduction of legal uncertainty—a series of micro reforms that can generate efficiency gains and boost the recovery.”

The researcher at IBRE/FGV acknowledges that there are risks facing the recovery but that they are unlikely to play a major role and get the economy out of its current track. “If something goes bad in the global economy, it may take us into a stagnation, even a negative GDP for a short period, but we are far from a sharp recession again,” she says. “Unless it is something really bad internationally or a domestic disaster, but I think we are far from that.”

In a similar tone, Ms. Zara reveals that her baseline scenario does not contemplate a drastic interruption of the current upward trend. “As of now, our basic scenario is that the international events will play a neutral role when it comes to Brazil,” she says.

It is thus unlikely that the chart representing the Brazilian economic recovery could become a “W” in the long run, as happened in the early 1980s slowdown.

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MoneyDec 16, 2018

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BY Mario Braga

Braga is a journalist from São Paulo. He is an Erasmus Mundus Journalism scholar pursuing his Master’s degree at Aarhus University (Denmark) and at the London’s City University.