In order to have a greater understanding regarding the Brazil’s current economic outlook, one should consider a 10-year perspective.
In 2010, Brazil had a robust growth at 7,5% in 2010 as there was a vigorous increase in income, mostly drove by the improvement in the labour market – with tamed unemployment rate and increase in credit use – that boosted the consumption and shift a million people towards the middle class.
Yet, after this period, Brazil’s economy contracted by almost 7 percent from 2015 to 2016 recession. The Brazilian real GDP grew by 1.1 percent per year in 2017 and 2018. Short-term economic indicators were still weaker over the 2019 first half. Investment flows remain subdued, as the economy faces a large spare capacity and there have been some concerns over the prospects for structural reforms.
In this vein, there have been some implications. First, there was a recent and significant increase in the gross fixed capital formation (FBKF, in Portuguese), in the national accounts. Ceteris Paribus, conditions, the increase in FBKF tends to increase industrial production, through investment. However, if there has been a little growth, investment resources have been used for different purpose other than the increase in production. Given the almost stagnation in the Installed Capacity Utilization Level (NUCI, in Portuguese), one can assert that the increase in FBKF has been shifted towards depreciation cost payment. Yet, it has not been enough to raise the production of goods. In other words, the increase in the FBKF occurred in order to replace the depreciation of impaired assets during the crisis. This in turn, demonstrates the latent fragile economy, keeping economic agents opportunities in a friable position.
The economy is still far below its potential output and the crisis has still considerably reduced the aggregate demand – caused by the significant drop in the real income and the consequent reduction in household consumption. This weighed all the political turmoil in 2018, joint with the truck strike in May 2018 – that has still impacted the current economic activity.
It was previously well-known that the 2019 would be a challenge year, as to untie the knot of the lack of economic growth would require, above all, a good political articulation – that has been under a trial. In addition to that, Brazil faced another negative shock in expectations by end of February, with the Vale’s dam disaster in Brumadinho, Minas Gerais. This dramatically hit the real chances of growth in the industrial sector.
Despite all these setbacks, some positive have been seen in Brazil, such as the tamed domestic inflation, with the supply side resumption and a monetary easing process in the country. In this vein, the Copom Focus survey expects inflation to end at 3.28% in 2019 and 3.73% in 2020. The Brazil’s Selic interest rate is expected to end 4.75% in 2019 and 2020. In addition to that, the GDP is expect to grow at 0.87% in 2019 and 2% in 2020.
Another positive prospect is the political reforms that are crucial to reduce uncertainties. The Pension reform base-text was approved in the first round in the Senate and its final approval will be likely set up in the following months. The government has also started the discussions on the States recovery measures (known as “Mansueto Plan”), the Tax Reform and “federalist pact” discussions. These are vital pro-market movements that have been taking place in the political field.
Turning to the real sector, the retail has improved in the recent surveys, with highlights to the service sector. Moreover, the industry has showed some positive signals as well, yet a gradual recovery.
In addition to that, the infrastructure agenda can also push the economic growth in the country, especially if it could be driven by the private sector, with a more harmonised and efficient policies and regulation, designed jointly the Government. Therefore, the infrastructure can also support the shift and reverse the unemployment downward trajectory, opening the avenue for the economic pickup and the increase in the potential GDP growth.
Nonetheless, one should bear in mind that it involves a medium-term development perspective. In the short term, it is important to reduce the uncertainty the economic agent’s uncertainty, as this is an important channel for the economy recovery and the decrease in the high-idleness.
Having said that, the microeconomic should be on the spotlight – in order to improve the market expectations and support the labour market resumption. Improvements in the business environment for the agribusiness, credit and labour markets, as well as the infrastructure sectors, are key to the country’s recovery. In this vein, the income will likely to circulate properly, jobs will increase and a virtuous circle of an increase in demand will be materialised. All depends on the implementation of these political achievements, which in turn seem to be under its way. Yet, the speed of this recovery is subdued by the political agenda.
Authors: Yan Cattani and Ana Monteferrario
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