Third-quarter growth figures released by Brazil’s national statistics institute (Ibge) on 2 December show that Latin America’s largest economy has gone into technical recession. Brazil looks set to enter 2022, an election year, plagued with sluggish growth, soaring inflation, and high unemployment.
Quarterly GDP shrank by 0.1% in the third quarter, after a 0.4% contraction in the second quarter on revised figures. In year-on-year terms, Brazil’s economy grew 4% in July-September 2021. The quarterly contraction was driven by an 8% decline in the agricultural sector. The industrial sector saw 0% variation (with a strong performance in construction compensating for the negative performance of other industrial activities, such as manufacturing and extraction). Services, which account for over 70% of Brazil’s economy, grew by 1.1%.
From a demand perspective, a decline in exports of goods and services, which fell by 9.8%, also underpinned the contraction in the third quarter (imports fell by 8.3%). Household consumption, however, expanded by 0.9%. Government spending grew by 0.8%.
Brazil’s overall recovery from the economic crisis caused by the coronavirus (Covid-19) pandemic has been stymied by soaring inflation. The consumer price index stood at 10.67% in October and is expected to close the year in double digits. The central bank (BCB) has responded with a cycle of aggressive rate hikes. The latest was enacted on 8 December, when the BCB’s monetary policy committee (Copom) agreed to increase the Selic, the benchmark interest rate, by 150 basis points to 9.25%. The Selic is now at its highest point in four years.
Although it is starting to fall, unemployment remains stubbornly high, at 12.6% in the third quarter. Furthermore, Ibge figures show that the average income for employed Brazilians is declining: average monthly earnings were down 11.1% in the third quarter this year compared with a year earlier, reflecting both the erosion of purchasing power through inflation and the fact that lower-paid jobs are driving the slow recovery of the labour market. Other economic indicators add to the gloomy picture. Industrial production was down for the fifth consecutive month in October, while retail trade had dropped for the third consecutive month, back to March 2020 levels, when the pandemic first hit.
The government led by President Jair Bolsonaro tried to remain upbeat in the face of the third quarter GDP figures, blaming the negative agricultural performance on climatic factors outside of its control (namely a drought and frosts). Economy Minister Paulo Guedes stands by his refrain that Brazil’s economy is recovering in a V-shape. Yet private sector economists surveyed weekly by the BCB have cut growth forecasts to 4.71% this year and just 0.51% in 2022. Some private banks are already predicting an economic contraction next year, with concerns exacerbated by uncertainty over the government’s fiscal rigour.
Reforms and benefits
The Brazilian congress promulgated part of a constitutional reform on 8 December which eases fiscal rules [WR-21-43] and frees up resources to fund the government’s new social programme, Auxílio Brasil. A lot of uncertainty surrounds the new benefit, which started being paid in November, due to pending legislation on the issue. Congress sought to resolve some of this uncertainty with the partial promulgation of the constitutional amendment known as the ‘PEC dos precatórios’, which will free up R$65bn (US$11.75bn) in next year’s budget. Some parts of the PEC, which also concerns the staggered repayment of court-mandated state debts or ‘precatórios’, have returned to the chamber after being modified in the senate.