Brazil set for worst economic drop in over a century

. Apr 13, 2020
coronavirus recession Homeless man in Belo Horizonte. Photo: Luis War/Shutterstock

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We hope you had a great Easter holiday. This week, we cover the possibility of Brazil having its worst GDP drop in 120 years. The true demographics of coronavirus cases in the country.

Coronavirus to cause Brazil’s biggest economic drop in 120 years

A World Bank report

released on Sunday paints a grim picture for Latin America and Brazil. The region has been subjected to multiple shocks over the past year, from social unrest in places such as Peru and Chile, to the collapse of oil prices … and now Covid-19. Gross Domestic Product in Latin America will shrink by 4.6 percent in 2020 —&nbsp;and have a mere 2.6-percent bounce-back the following year, according to analysts. In Brazil, GDP is expected to fall by 5 percent, and have a slim, 1.5-percent recovery in 2021.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1914216" data-url="https://flo.uri.sh/visualisation/1914216/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Why it matters.</strong> If confirmed, Brazil will suffer its worst recession in 120 years.</p> <p><strong>Unemployment.</strong> All projections point toward a &#8220;<a href="https://brazilian.report/podcast/2020/04/02/explaining-brazil-podcast-brazil-facing-a-job-apocalypse/">job apocalypse</a>&#8221; in Brazil —&nbsp;with the number of unemployed workers ranging from 20 to 40 million people by the end of the coronavirus crisis. Such a hit to the job market would be without parallel anywhere in the world for the last 40 years.</p> <ul><li>A study by researchers at think tank Fundação Getulio Vargas shows that even with the measures adopted by the government to counter the recession, the overall salary revenue would drop by 5.2 percent — without these measures, however, the skid would be 10.3 percent.</li></ul> <p><strong>History.</strong> Since the late 1800s, significant political shifts in Brazil (whether democratic or not) have come after dire recessions, as we at <strong>The Brazilian Report</strong> showed in August 2018. “Political shifts in Brazil do have a cause-effect relationship with the economy. When the economy is doing well, governments are able to overcome crises. When the economy is down, popular support goes away and governments fall,” says political scientist Maurício Santoro, a professor at the State University of Rio de Janeiro.</p> <hr class="wp-block-separator"/> <figure class="wp-block-image"><img src="https://brazilian.report/wp-content/uploads/2018/08/ruptures-brazil-1024x585.jpeg" alt="recessions ruptures brazil" class="wp-image-7294" srcset="https://brazilian.report/wp-content/uploads/2018/08/ruptures-brazil-1024x585.jpeg 1024w, https://brazilian.report/wp-content/uploads/2018/08/ruptures-brazil-300x171.jpeg 300w, https://brazilian.report/wp-content/uploads/2018/08/ruptures-brazil-768x439.jpeg 768w, https://brazilian.report/wp-content/uploads/2018/08/ruptures-brazil-610x348.jpeg 610w, https://brazilian.report/wp-content/uploads/2018/08/ruptures-brazil.jpeg 1280w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure> <hr class="wp-block-separator"/> <p><strong>Challenges.</strong> Brazil, just like many of its neighbors, must tackle Covid-19 with constrained fiscal space. Moreover, higher levels of informality make it difficult to reach out to all households and protect all sources of employment. &#8220;At the same time,&#8221; says the World Bank report, &#8220;governments will have to take on the burden of much of the losses. Socializing the losses may require taking ownership stakes in financial sector institutions and strategic employers through recapitalization.&#8221;</p> <p><strong>Services economy.</strong> Brazil&#8217;s economy is highly dependent on family consumption —&nbsp;and the services sector has more weights here than in developed countries. And that sector was precisely the worst-affected one by Covid-19. Data from other countries —especially in Asia —&nbsp;shows that the services sector recovers much more slowly than industries.</p> <hr class="wp-block-separator"/> <h2>Are Covid-19 &#8220;high-risk groups&#8221; still a thing?</h2> <figure class="wp-block-image"><img src="https://brazilian.report/wp-content/uploads/2020/04/shutterstock_1645201414.jpg" alt="coronavirus. Young woman wearing a mask. Photo: Rajaraman Arumugam/Shutterstock" class="wp-image-35800" srcset="https://brazilian.report/wp-content/uploads/2020/04/shutterstock_1645201414.jpg 1000w, https://brazilian.report/wp-content/uploads/2020/04/shutterstock_1645201414-300x200.jpg 300w, https://brazilian.report/wp-content/uploads/2020/04/shutterstock_1645201414-768x512.jpg 768w, https://brazilian.report/wp-content/uploads/2020/04/shutterstock_1645201414-610x407.jpg 610w" sizes="(max-width: 1000px) 100vw, 1000px" /><figcaption>Young woman wearing a mask. Photo: Rajaraman Arumugam/Shutterstock</figcaption></figure> <p>At the beginning of the coronavirus outbreak, the received wisdom was that the disease posed a much larger threat to older, more vulnerable people. But in Brazil, one-quarter of those who died from the coronavirus were not a part of the so-called high-risk groups (senior citizens, those with pre-existing conditions, or autoimmune problems). And that rate is increasing:</p> <ul><li>On March 27, only 11 percent of deaths were among people under 60 with no pre-existing condition.</li></ul> <p><strong>Why it matters.</strong> President Jair Bolsonaro has been the world&#8217;s biggest defender of the so-called &#8220;vertical isolation&#8221; approach. That is, only confining clusters of the population that are more likely to die or suffer severe damage from Covid-19. But the more we know about the disease, the less effective this approach seems to be.</p> <div class="flourish-embed flourish-map" data-src="visualisation/1914600" data-url="https://flo.uri.sh/visualisation/1914600/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Risk areas.</strong> Supporters of the president have tried to minimize the outbreak by pointing out that cases are concentrated in large urban centers, with state capitals accounting for 80 percent of infections. But at least one-fifth of Brazilian municipalities with confirmed cases are deemed &#8220;vulnerable.&#8221;</p> <ul><li>This rating, elaborated by the Oswaldo Cruz Foundation (a reference in epidemiological studies), crosses socioeconomic data with hospital infrastructure. In these areas, social isolation has been loose, and several flaws have been observed concerning monitoring and notification of cases —&nbsp;allowing the virus to spread undetected.</li></ul> <p><strong>By the numbers.</strong> Until this morning, Brazil had confirmed 22,169 infections and 1,223 Covid-19 deaths.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>To financial news website <em>Seu Dinheiro</em>, Brazilian asset manager Werner Roger listed his &#8220;must-have&#8221; conditions for investing in the Brazilian stock market: companies must have a solid cash position, little-to-no short-term debt, an organized supply chain … and revenues in U.S. dollars. Mr. Werner has increased his position in five stocks, most linked to commodities: Ferbasa (ferroalloys and chrome ore), São Martinho (sugar), Kepler Weber (grain silos), Tronox (inputs for paints and plastics), and Tupy (auto parts).</p> <hr class="wp-block-separator"/> <h2>Will Brazil become the new America?</h2> <p>Since his arrival to power, President Jair Bolsonaro has taken his political cues from his U.S. counterpart, Donald Trump. Just like Mr. Trump, Mr. Bolsonaro showed himself as a coronavirus-skeptic when the pandemic reached the Western hemisphere. But the Brazilian leader stuck to his guns even after Mr. Trump himself admitted to the severity of the outbreak — with the U.S. becoming the new Covid-19 epicenter. Brazil could be destined to a similar fate, as the death toll curves in selected countries show.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1905379" data-url="https://flo.uri.sh/visualisation/1905379/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>Political tension 1. </strong>Once again, the week starts with Brazilian Health Minister Luiz Henrique Mandetta hanging on to his job by a thread. A week after <a href="https://brazilian.report/newsletters/brazil-daily/2020/04/07/president-jair-bolsonaro-health-minister-mandetta/">almost being fired</a>, the minister gave an interview to <em>Globo TV</em> — the media group Jair Bolsonaro calls &#8220;the enemy&#8221; — speaking from the seat of the Goiás state government, after Governor Ronaldo Caiado announced he would <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/03/25/crisis-unfolding-bolsonaro-loses-support-from-powerful-ally/">no longer support Mr. Bolsonaro</a>. Mr. Mandetta said he hopes the government will have a &#8220;unified message&#8221; on Covid-19, complaining that &#8220;Brazilians don&#8217;t know whether to listen to the Health Minister or the president,&#8221; who has undermined the pandemic. Hours after the president said that the virus is &#8220;almost gone,&#8221; the minister said: &#8220;We have always known that May and June would be the toughest months.&#8221;&nbsp;</li><li><strong>Political tension 2. </strong>Sources close to Democratas — the right-wing party to which Mr. Mandetta belongs — said they were aware of the interview and backed the minister. But Mr. Mandetta didn&#8217;t give the president a heads up that he would be speaking to the most-watched weekend news program in the country.&nbsp;</li><li><strong>Financial aid. </strong>The House is scheduled to vote today on the so-called &#8220;Mansueto Plan,&#8221; a financial aid package to states that allows local administrations to renegotiate their debts, providing they implement austerity measures. However, the plan&#8217;s rapporteur proposed a significant change in the original bill —&nbsp;suspending debt payments, making the federal government compensate for states&#8217; loss in revenue, and allowing states to contract federally-backed credit of up to 8 percent of each state&#8217;s net current revenue, as long as the money is used in the fight against Covid-19. States don&#8217;t have to do anything in return.</li><li><strong>Election. </strong>On March 30, this Weekly Report talked about the <a href="https://brazilian.report/newsletters/brazil-weekly/2020/03/30/coronavirus-brazil-municipal-election-2020-bolsonaro/">uncertainties surrounding Brazil&#8217;s 2020 election</a>, scheduled for October. At the time, authorities were quiet on the subject, but two weeks later, Supreme Court Justice Luís Roberto Barroso —&nbsp;who takes over as the presiding justice at the Superior Electoral Court late in May —&nbsp;has admitted to the possibility of postponing the vote. As we had discussed, Brazil has no alternative system to in-person voting, which is a near-impossibility amid a pandemic.</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>Emergency aid.</strong> The first installment of a three-month, BRL 600 (USD 117) emergency salary to informal workers began being paid out to beneficiaries on April 9. In just 24 hours, the app &#8220;Caixa Auxílio Emergencial&#8221; — created by the government to help people enroll for the benefit — became the <a href="https://brazilian.report/newsletters/brazil-daily/2020/04/09/brazilian-states-free-continue-isolation-measures-supreme-court/">most-downloaded app in Brazil</a>, according to data from the Zurich-based market research firm 42Matters. Among the top 16 apps, five have some connection to government benefits.</li><li><strong>Isolation.</strong> The Supreme Court issued an injunction allowing states and municipalities to continue restrictive measures even if the president issues an order to the contrary —&nbsp;<a href="https://brazilian.report/newsletters/brazil-daily/2020/04/09/brazilian-states-free-continue-isolation-measures-supreme-court/">greenlighting states to defy Jair Bolsonaro</a>. In São Paulo, Brazil&#8217;s worst-affected state, authorities are considering the idea of a forced lockdown — as monitoring shows that compliance with isolation guidelines is at 55 percent of people, way below the 70-percent goal.</li><li><strong>Donation.</strong> Itaú Unibanco, Brazil&#8217;s biggest private bank, will reportedly announce today a BRL 1-billion (USD 195 million) donation for the fight against the coronavirus. It will be the biggest single donation in Brazilian history —&nbsp;and represents <a href="https://brazilian.report/business/2018/08/13/brazilian-banks-profits/">3.5 percent of Itaú&#8217;s 2019 net profits</a>. According to political columnist Elio Gaspari, who broke the story, the money will be administered by a board of healthcare professionals.</li><li><strong>Retail.</strong> A new survey shows that e-commerce revenue for retailers is up since the coronavirus reached Brazil, late in February. Online sales in Q1 were up 33 percent from last year, with 50 million orders. The average order, however, is down 4.5 percent —&nbsp;also due to the pandemic.

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