Productivity bombs in coronavirus crisis

. Jun 22, 2020
Brazilian productivity bombs in coronavirus crisis Image: Foxeel/Shuttersstock

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It’s not Groundhog Day — it’s another crisis in the federal government. The drop in productivity caused by the pandemic. How inflation has a larger effect on the poor.

Pandemic slashes Brazilian productivity

The productivity level of the Brazilian economy dropped

1.7 percent in Q1 2020 when compared to the same period last year. This is the sharpest drop since a 2.5-percent fall in Q4 2015 — when Brazil was in the middle of what was then its worst recession on record. The situation is only expected to get worse, however. As social isolation measures were only implemented late in March, they had a reduced impact on Q1 —&nbsp;the drop in productivity during Q2 should be brutal.</p> <p><strong>Why it matters.</strong> Brazil has passed the period of the so-called &#8220;demographic bonus,&#8221; that is, when young people of working age far outnumber older populations. Therefore, a sharp increase in productivity is the only way to increase per capita income over the next few decades.</p> <p><strong>Slow pace.</strong> While the pandemic is set to aggravate Brazil&#8217;s productivity problem, the issue predates the coronavirus. Productivity levels have advanced very slowly since the 1980s and had a massive drop during the 2014-2016 crisis.&nbsp;</p> <ul><li>The drop in &#8220;total factor productivity&#8221; (which is a measure of economic efficiency and accounts for part of the differences in cross-country per-capita income) dropped more severely than in past recessions, and its recovery was also slower, at an average of only 0.45 percent per quarter.</li><li>That has a lot to do with Brazil&#8217;s neverending state of political crisis. Uncertainty has made companies delay investments and formal hirings. In past years, Brazil&#8217;s economy has become increasingly informal — which is also a factor that drives productivity down.</li></ul> <p><strong>Lost decade. </strong>The 1980s are known in Brazil as the &#8220;lost decade.&#8221; Historical data shows that it was the only 10-year span on record to register a drop in GDP per capita. The 2011-2020 period should be just as bad, if not worse. In just three months, the pandemic helped scrap whatever small gains were made in per capita GDP since 2010. And, as we have pointed out, we are still beginning to measure the true extent of the crisis.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/2900664" data-url=""><script src=""></script></div> <hr class="wp-block-separator"/> <h2>Another week, another crisis</h2> <p>Yet again, the week starts with President Jair Bolsonaro on the ropes. On Thursday, his <a href="">longtime friend Fabrício Queiroz</a> — who served as an advisor to his eldest son Senator Flávio Bolsonaro&nbsp;—&nbsp;was arrested. Mr. Queiroz is believed to be at the center of a money-laundering scheme which, investigators say, benefited Flávio. To make matters worse, the former aide was found in a home belonging to the senator&#8217;s lawyer, a <a href="">shady character named Frederick Wassef</a>.</p> <p><strong>Jumping the grenade.</strong> Mr. Wassef said the Bolsonaros knew nothing about the fact that Mr. Queiroz was living on his estate. On Sunday, he confirmed he is no longer Flávio Bolsonaro&#8217;s lawyer.&nbsp;</p> <ul><li>Allies to the president want him to be distanced from the lawyer —&nbsp;but Ms. Wassef has indicated he might not tolerate being tossed aside. As leverage, he has hinted, on multiple occasions, that he knows secrets the First Family prefers to keep hidden.</li></ul> <p><strong>Why it matters.</strong> This new crisis comes precisely at a moment in which the government hoped to decompress tensions with other branches of government. This further isolates Mr. Bolsonaro and makes any support in Congress far more expensive — in terms of dividing power with what the president often called &#8220;old politics.&#8221;</p> <p><strong>Bound for impeachment?</strong> Mr. Bolsonaro is facing a multi-headed crisis: the pandemic and its devastating economic consequences, investigations into his son, a probe in the electoral courts, and actions by the Supreme Court against his supporters. His ousting is certainly a possibility — but not a given.&nbsp;</p> <ul><li>On his side lies the fact that Vice President Hamilton Mourão has <a href="">not actively engaged in promoting himself</a> as an alternative. The political establishment would hardly initiate impeachment proceedings without knowing what would come next.</li></ul> <p><strong>How to defuse the crisis.</strong> The president must make a convincing case that the cost of ousting him from office would be far greater than keeping him. That is a hard argument to make, however, as Mr. Bolsonaro has been the leading rogue factor of his own administration. He has undermined the Covid-19 fight, boycotted the reforms his own economic advisors proposed, and has shown no economic plan to allow Brazil to rise from the ashes of the coronavirus pandemic.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Bradesco BBI analysts have become more optimistic about Brazilian steelmakers. Sales dropped less than expected and strong Chinese demand could see iron ore prices soar. However, improved conditions may have already been priced in, leaving little room for stock prices to rise further. Bradesco BBI is neutral on Usiminas and Gerdau (setting target prices at BRL 7.30 and BRL 17, respectively), and has labeled CSN an &#8220;underperformer,&#8221; with a BRL 11 target price.</p> <p class="has-text-align-center"><strong><em>Natália Scalzaretto</em></strong></p> <hr class="wp-block-separator"/> <h2>How inflation is harsher on poorer families</h2> <p>The pandemic has pushed inflation rates down in Brazil. But not for everyone, according to a study by the Institute for Applied Economic Research (Ipea). For poorer populations, prices actually <em>rose</em> 0.45 percent between January and May 2020. That is because food products account for a bigger chunk of their budget. Meanwhile, high-income families actually saw prices go down 0.45 percent over the same period —&nbsp;and that&#8217;s because they spend more, for instance, on transportation. And the pandemic caused oil prices and air travel fares to plummet.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/2930729" data-url=""><script src=""></script></div> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>Sanitation.</strong> On Wednesday, the Senate is expected to vote on a new regulatory framework for sanitation services —&nbsp;<a href="">allowing private companies</a> to enter the market. The government hopes the changes will attract BRL 700 billion in new investments, helping the country kickstart the economy after the pandemic. Sewage services remain accessible to <a href="">just 50 percent</a> of the Brazilian population, while 35 million citizens have no access to treated water.</li><li><strong>Emergency aid.</strong> Over the weekend, House Speaker Rodrigo Maia argued in favor of extending the three-month BRL 600 coronavirus emergency salary for vulnerable populations for &#8220;two or three additional months.&#8221; The government had announced that it would provide only two extra payments, while cutting the value of the benefit in half. While there is no debate over how necessary this financial cushion is for families to <a href="">offset the effects of the crisis</a>, experts warn about its effects on the budget. As it is, Brazil&#8217;s 2020 budget deficit should be around BRL 800 billion (USD 150 billion).</li><li><strong>Rio.</strong> Already battling an <a href="">impeachment process</a>, Governor Wilson Witzel has just lost his second health secretary in less than a month. Fernando Ferry, who announced his resignation on Saturday, complained about being forced to pay for &#8220;problematic contracts.&#8221; Mr. Witzel&#8217;s administration faces multiple accusations of embezzling money earmarked for the Covid-19 fight.</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>Coronavirus.</strong> Over 1 million people have contracted <a href="">Covid-19 in Brazil</a>. Meanwhile, the death toll has topped the 50,000-people mark, making the pandemic the single deadliest event in Brazilian modern history. The coronavirus death count has even surpassed that of the War of the Triple Alliance, the bloodiest conflict in Brazilian history — which killed 50,000 Brazilians between 1864 and 1870. The count, of course, excludes the horrors of colonization and slavery — whose true death totals we will never accurately know.</li><li><strong>ESG. </strong>Seven major European investment firms will <a href="">divest</a> from Brazilian beef producers, grains traders, and even government bonds if they do not see progress in halting the surging destruction of the Amazon rainforest. Companies pointed out that deforestation “surged to an 11-year high in 2019, Mr. Bolsonaro’s first year in office, and has risen a further 34 percent in the first five months of 2020.”</li><li><strong>Cabinet.</strong> After 14 months of controversy and little to no consequential policymaking, economist Abraham Weintraub is out of the Education Ministry. He landed on his feet, though, and shall be <a href="">nominated for a role at the World Bank</a> — despite the fact that Mr. Weintraub describes himself as staunchly anti-globalist. Experts warn that naming a rogue actor to the World Bank will only worsen Brazil’s already tattered image internationally.</li><li><strong>Closed borders.</strong> The Brazilian government has extended restrictions on all foreigners to enter Brazil for another 15 days. The decree allows for a few exceptions: Brazilian residents born abroad, those with work permits, diplomats, passengers with connecting flights — who must not leave the airport boarding area — and foreign government contractors.

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