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Deluded and Disappointed, Economists Rethink Brazil's Future

Deluded And Disappointed, Economists Rethink Brazil's Future

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With Latin America’s largest economy forecast to contract in the first quarter, economists are poring over their models to figure how Brazil’s recovery eluded them for a third year.

Activity shrank 0.2% in the three-month period, according to economists surveyed by Bloomberg ahead of data set to be released Thursday. As recently as March, they expected gross domestic product to expand 0.56%. If confirmed, it will be the first quarterly contraction since recession ended in 2016 and the third year of disappointing growth.

Deluded and Disappointed, Economists Rethink Brazil's Future

For 2019, they’ve cut their growth outlook for 13 straight weeks, most recently to 1.2%. Temporary factors – the fatal collapse of a dam, flagging car exports to beleaguered Argentina, delayed approval of a pension overhaul – are among the reasons for the debacle, but there are also longer-term problems.

David Beker, chief Brazil economist for Bank of America Merrill Lynch, just last November had one of the highest forecasts for 2019 -- 3.5% growth. He now recognizes that was a mistake, and in a May 16 report entitled ‘What went wrong with GDP?’ cut his call for the fourth time to 1.2%.

“I was very bullish, I thought confidence would remain in place and I was expecting fast approval of the reform. It’s taking much longer than expected,’’ Beker said in an interview, in reference to a surge of optimism that followed Jair Bolsonaro’s election in October. “This economy became much more leveraged than it was before and unemployment is much higher.’’

Worse, he says Brazil’s potential GDP -- its highest level of sustained economic output -- has slipped to about 1.5%. Adriana Dupita, Bloomberg’s Brazil economist, is also preparing to lower her calculation of potential GDP. She recently attended a luncheon at which a group of economists considered the possibility that growth just north of 1% for a third year is more than extended malaise, and in fact is all the economy is capable of delivering.

“Looking at the numbers, it’s much harder to defend potential output of 2.5%, which is what almost everybody has, myself included,’’ Dupita said. “Increasingly this relies on the assumption something is going to be done on the productivity front. As time passes and we look at new data, reforms will have to be deeper to unlock such growth.’’

Deluded and Disappointed, Economists Rethink Brazil's Future

Tumbling growth forecasts go hand in hand with Bolsonaro’s popularity among investors. Approval of his government fell to 14% in May, from 86% in January, according to a survey of 79 money managers, economists and traders by XP Investimentos. Those rating the administration as bad or awful rose to 43%, from 1%.

“All these groups from the nation’s economic and educational elite, with money to afford the professional opinion of the best political analysts, let themselves be deluded much more than the average citizen about what Bolsonaro’s election really represented,” Fernando Dantas, a columnist at local news outlet Agencia Estado, wrote this week.

The initial market euphoria has collided with the reality of Bolsonaro’s inexperience negotiating with a fractured Congress. Overhaul of Brazil’s pension system had initially been hoped for by mid-year, and now is unlikely to get done before the fourth quarter, in the best-case scenario. Until it’s approved, all other major bills that could unleash investment and growth, such as recasting the nation’s mind-boggling tax system, remain on hold.

“It’s possible to produce a short-term miracle, get the economy growing 5% to 6% annually for five, six, seven straight years, simply by unlocking everything -- easing regulations, simplifying and reducing taxes,” Economy Minister Paulo Guedes said in Brasilia on Wednesday.

Meantime, inability to fix its economy is literally making Brazil poorer. The country has recorded declines in GDP per capita during two of the past four decades, according to a May report from Goldman Sachs Group Inc. And the most recent recoveries were driven by private consumption rather than the investment spending that would have boosted capacity and sustained productivity growth going forward, the report said.

Deluded and Disappointed, Economists Rethink Brazil's Future

The economy is still far from topping out. Capacity utilization fell in the first quarter, and remains just above its historic low. That’s evidence of lack of demand, and should force the central bank to realize it can further lower the benchmark Selic interest rate from a record-low 6.5% without significant inflationary pressure, said James Gulbrandsen, a Rio de Janeiro-based money manager at NCH Capital.

Deluded and Disappointed, Economists Rethink Brazil's Future

Consumption continues to be weighed down by unemployment at 12.7% -- only a single percentage point lower than its worst level two years ago -- and Bank of America’s Beker says the rate will remain in double-digits until the end of 2020.

That grinding recovery is indicative of the trauma that the 2015-2016 recession inflicted, according to Sergi Lanau, deputy chief economist at the Washington-based Institute of International Finance.

“People get scarred from experience,” Lanau said. “The experience of a long recession may make you reassess what’s really going on in the country.’’

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Walter Brandimarte

©2019 Bloomberg L.P.