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The outlook for Brazil's economy calls for growth but the
widening deficit is increasing the need for fiscal prudence,
implying lower public investment and signaling the inevitable end
of some emergency COVID-19 stimulus measures such as cash transfers
to vulnerable populations.
Brazil's GDP increased by 7.7% in the third quarter of 2020
compared with the second, but it was insufficient to offset the
9.6% drop it posted in April-June. Monthly indicators show that the
pace of recovery continues to slow down. The progressive withdrawal
of fiscal stimulus will constrain growth in the first half of 2021,
while the availability of a vaccine for the coronavirus disease
2019 (COVID-19) virus will benefit the economy in the second half
of the year.
Growth in Q3 2020 was driven by the reopening of many sectors
and businesses after the lifting of the
COVID-19-virus-related-lockdown, and also by the fiscal stimulus
package provided by the government to help the economy navigate the
pandemic. The data confirms the rebound suggested by the monthly
index of economic activity (MIEA) - published by the Central Bank
of Brazil (Banco Central do Brasil: BCB) - which started expanding
as early as May. Still, the drop during March and April was so
severe that GDP is still 4.1% lower than its fourth-quarter 2019
level.
Technically, Brazil has come out of recession, but it will take
at least until late 2021 or early 2022 to return to the GDP level
recorded in the fourth quarter of 2019. From a demand perspective,
drivers of growth in the third quarter were private consumption (up
by 7.6% q/q) and fixed investment (up by 11.0%); in both cases,
only partially rebounding after plummeting in the second quarter.
Brazilian consumers are benefiting from sizeable transfers from the
government, though these transfers were are already declining in
the last quarter of 2020. Interest rates have decreased following
the BCB's decision to cut its policy rate, also benefiting
consumption.
In annual terms, GDP was down by 3.9% with respect to
quarter-three 2019. This figure more clearly portrays the state of
Brazil's economy. IHS Markit forecasts that the economy will return
to pre-pandemic levels only in early 2022.
The manufacturing Purchasing Managers
Index (PMI) remained strong in November, signaling that the
expansion will continue during the last quarter of the year. The
service PMI also remained in expansionary territory during
November; it showed that for the first time since February
employment in the service sector has increased. Other sentiment
indicators offer mixed signals and demonstrate the unevenness of
the post COVID-19 recovery: after expanding from May through
September, consumer confidence decreased in October and November
(month on month); the same happened to the service sector's
confidence index. Confidence in the manufacturing sector continued
to expand.
In September, for the first time since the beginning of the
pandemic, the labour market yielded positive results in terms of
employment; the economy created 800,000 new jobs, but the absolute
level of employment is still 10 million jobs below February 2020;
labour market indicators usually lag the economy. On the upside of
the sequence, growing employment becomes part of a virtuous cycle,
as it leads to higher spending and consumption.
A major risk to Brazil's expansion in 2021 is the weak state of
public finances, which require a significant effort not only in
terms of the budget but also in the approval of unpopular
structural reforms (in the short-term an administrative and a tax
reform); if these bills are not approved by congress, it may cause
a major shock to market confidence, and may lead business sentiment
and investment to decline. Markets may become very volatile and
Brazil's sovereign ratings may be revised downwards. Public debt in
Brazil is approaching unsustainable levels and inability to quickly
enact these reforms will cause Brazil to continue down an
increasingly difficult financial path. The government faces
additional pressure to enact these reforms quickly due to the fact
that significant reforms are less feasible during an election year,
which is coming up quickly in 2022.
At the same time, passage of such reforms or efforts to increase
the flexibility within the budget (which would reduce the growth of
various social benefits) would likely be politically unpopular and
heightens the risk of social unrest. Coupled with the upcoming
elections in 2022 and the already volatile environment, this could
create a significant downside risk for Brazil's medium-term
growth.
The outlook for the next two quarters is one of deceleration in
economic growth as the fiscal stimulus measures are progressively
withdrawn. IHS Markit assumes that a vaccine will be available for
most Brazilians in the third quarter of 2021, which will help the
normalisation of most activities, especially in the service
sector.
Our latest forecast is for GDP to grow by 3.2-3.4% in 2021 after
dropping by 4.6% in 2020.
Posted 18 December 2020 by Rafael Amiel, Ph.D., Director, Latin America & Caribbean Economics
