Brazil Economy Sees Uneven Recovery After Worst Quarter Ever
Brazil Economy Hits Bottom With Worst Quarterly Plunge Ever
(Bloomberg) -- Brazil’s economy posted its largest slump on record in the second quarter and its recovery is likely to be irregular as the crucial services sector remains weak despite emergency government spending.
The country was early to roll back social distancing policies against a pandemic that has killed more than 120,000 Brazilians, and policy makers shelved austerity in favor of stimulus to help demand. While those actions sparked a “V-shaped” retail recovery, services -- which account for more than half of gross domestic product when commerce is excluded -- are still struggling.
Latin America’s largest economy plunged 11.4% in the second quarter from a year ago, according to data released on Tuesday. While the worst of the virus-driven downturn is past and analysts are paring their 2020 recession calls, imbalances are likely to limit future growth. Furthermore, with aid expected to stop flowing by year-end, unemployment may continue to rise while the government struggles with budget problems and a growing debt load.
“There are no shortages of risks for the recovery,” said Andre Perfeito, chief economist at brokerage Necton Investimentos. “We are also vulnerable to global risks, including the U.S. elections.”
In response to the pandemic, the central bank cut its interest rate to a record low, while President Jair Bolsonaro’s administration is spending some 512 billion reais ($95.2 billion) on aid including monthly stipends for informal workers and employment subsidies, according to Treasury data.
Core retail sales powered back to pre-pandemic levels at the end of the second quarter amid those measures, according to Bloomberg Economics. On Tuesday, Bolsonaro said he will extend the popular stipends, though at a reduced monthly amount of 300 reais instead of the current 600 reais.
What Our Economist Says
“The extension of the program is a positive -- even if at half the value, and though at a very high fiscal cost -- considering that labor-market conditions deteriorated sharply and are likely to recover slowly. With no room left for additional policy stimulus in the quarters ahead, a bet in reforms may not boost short-term growth but could help to prop up potential long-term growth.”
-- Adriana Dupita, Latin America economist, Bloomberg Economics
“Some sectors like construction have adapted well and quickly, and bank lending has also had good results,” said Rafaela Vitoria, chief economist at Banco Inter. “The emergency aid has increased savings and this will sustain demand for a while.”
On the other hand, it took the services sector until June to eek out its first monthly gain since the start of the pandemic. Capacity restrictions are cutting into revenues for businesses including hair salons and restaurants, while consumers are also more likely to avoid services rather than stop purchasing tangible goods amid downturns.
Never Better
Brazil’s two-speed recovery has been in full display in the town of Sao Raimundo Nonato, in the northeastern state of Piaui, one of the country’s poorest. Home to some of the oldest cave paintings in the Americas, Sao Raimundo Nonato saw the number of tourists who normally support its economy drop to nearly zero as the pandemic spread. Yet sales have never been better for its local commerce, as Bolsonaro’s monthly stipends reach over two-thirds of the city’s adult population.
“My mother’s supermarket has had an increase of over 20% in sales, and delinquency rates for those who couldn’t afford to pay upfront for goods is at record low,” said Wellington Damasceno, a 40 year-old manager at a local unit of Caixa Economica Federal. “The lines of people to get the benefits are huge in the city.”
Spending Limits
Still, private sector analysts and policy makers including Economy Minister Paulo Guedes have warned that emergency aid can’t go on forever as Brazil’s budget deficit surges and debt levels approach 100% of GDP in 2020.
Higher spending may jeopardize a public spending cap, which investors describe as crucial for Brazil’s fiscal credibility. It may also leave the country more susceptible to another sovereign credit rating downgrade.
In the end, government stimulus wasn’t enough for establishments such as Piantella, one of the most traditional restaurants in the capital city of Brasilia. A well-known gathering place for politicians for over four decades, it succumbed to the pandemic and shut its doors permanently this year.
“We were hit too hard by Covid-19,” Roberto Peres, Piantella’s former owner, said in a message to clients and friends, adding that it made operations “unfeasible.“
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