The latest data suggest that Brazil’s recovery so far has been quicker than we expected, which has prompted us to revise up our 2020 GDP growth forecast to -5.0% (previously -7.0%). However, tighter policy, labour market weakness and the continued spread of the virus mean the recovery from here on will be much slower. We expect that GDP will still be some 6% below its pre-crisis trend by end-2022.
- The latest data suggest that Brazil’s recovery so far has been quicker than we expected, which has prompted us to revise up our 2020 GDP growth forecast to -5.0% (previously -7.0%). However, tighter policy, labour market weakness and the continued spread of the virus mean the recovery from here on will be much slower. We expect that GDP will still be some 6% below its pre-crisis trend by end-2022.
- A sense of optimism about the economic outlook for Brazil is growing. The central bank’s economic activity indicator suggests that, by June, the economy had recovered about 40% of the ground lost during the downturn between February and April. Mining and professional services have held up through the crisis, while the manufacturing and retail sectors have recovered strongly. (See Chart 1.)
- More timely data – such as surveys published by the FGV and electricity generation figures – suggest that the recovery continued in July and August. (See Charts 2 & 3.) Our Mobility Tracker, which gauges activities like visits to retail outlets and workplaces and the use of public transport, indicates that activity in Brazil has pulled further ahead of its Latin American peers. (See Chart 4.)
- Admittedly, it’s not all good news. Imports have stayed weak (reflecting lower volumes rather than lower prices of imported goods), which may be a sign of ongoing soft domestic demand. (See Chart 5.) And some sectors like air travel and accommodation, while recovering, are still very weak. Even so, Brazil’s economy has so far fared better than we had initially expected. This probably reflects the relatively limited nature of containment measures and the substantial fiscal response (more on this below).
- Overall, it looks like GDP contracted by about 10.5% q/q in Q2 (data due 1st September), but the early indications are that output may expand by somewhere in the region of 7% q/q in Q3. As a result, we have revised up our 2020 GDP growth forecast to -5.0% (previously -7.0%).
- We think the recovery will lose momentum though. For one thing, the continued spread of the virus is likely to have lasting effects. While the authorities don’t appear inclined to tighten containment measures (as has happened elsewhere in the region), high numbers of coronavirus cases will result in continued cautious behaviour, hitting the recreation and transport sectors in particular.
- The labour market is also weakening. A survey taken by the statistics office on a weekly basis shows that the unemployment rate has risen sharply. (See Chart 6.) That reflected the loss of close to three million jobs between early May and the final week of July. Household incomes have been lifted in the meantime by fiscal support (which helps to explain the rebound in retail sales) but this is unlikely to last.
- A cornerstone of the fiscal package is income support (so-called “coronavouchers”) which has reached about 65 million people. The government is seeking to extend these benefits and to make them permanent (under a new social welfare policy called Renda Brasil). It’s unclear at this stage what shape these future payments will take. But it looks like they will be lower (200-300 reais/month versus 600 reais currently).
- There is a broader debate within political circles about the fiscal stance in 2021 and beyond, with growing calls for the government to break the spending cap (which is enshrined in the constitution and limits growth in primary spending to the rate of inflation). (See here.) Our working assumption is that the government will stick to plans for austerity next year, implying spending cuts in other areas and possible tax rises.
- That would ease concerns about the public debt trajectory, allow the central bank to keep the policy rate at its current low level into 2022 and retain investor confidence. But it would come at the cost of weaker demand. Accordingly, after a relatively modest fall in GDP of 5% this year, we expect growth of only 3.0% in 2021 and 2.0% in 2022 (previously 2.5% in both years). (See Chart 7.) Based on these forecasts, the level of real GDP would still be some 6% below its pre-crisis trend by end-2022. (See Chart 8.)
- Were the spending cap to be broken, the fiscal stance would be looser, which would present an upside risk to our 2021 forecast. However, given Brazil’s troubling government debt dynamics, it would also result in a higher risk premium, a weaker currency and probably trigger interest rate hikes. Bond yields at the short and the long end of the curve would probably rise and financial conditions would tighten, which would partly offset the boost from a looser fiscal stance.
Chart 1: Economic Output (% Change, SA)
Chart 2: Electricity Generation & GDP (% y/y)
Chart 3: GDP & FGV Expectations Indices
Chart 4: Capital Economics Mobility Trackers
Chart 5: Imports ($US mn/day, Weekly Avg.)
Chart 6: Unemployment Rate (%, IBGE Weekly Survey)
Chart 7: Real GDP Growth (%)
Chart 8: Real GDP (SA, Q4 2019 = 100)
Sources: MDIC, ONS, FGV, Apple, Google, Moovit, IBGE, Refinitiv, CE
William Jackson, Chief Emerging Markets Economist, email@example.com