Brazil Is a Virus Mess But Its Economy Is Outperforming

(Bloomberg) -- Brazil, home to the most severe Covid-19 outbreak in Latin America, is emerging with the region’s shallowest recession this year, thanks to a faster economic reopening and temporary stimulus measures.

The nation that trails only the U.S. as a global virus hotspot has seen key indicators including industrial output and retail sales outstrip economist expectations just as stores and factories resume operations and the government spends billions of dollars worth of emergency aid.

Economists watching mobility trends during the pandemic also see evidence that Latin America’s largest economy is leading the way. Gustavo Rangel, ING Financial Markets’ chief economist for the region, points to workplace-visit data that shows “a faster recovery in Brazil” compared with its neighbors.

“Brazil benefited from keeping certain sectors of the economy open,” said Marco Oviedo, Barclays’ head of Latin America Economics Research. He cautioned, however, that returning to work shouldn’t mean ignoring social distancing recommendations. “You have to send a message that this is serious.”

The recent data has led Brazil’s central bank chief Roberto Campos Neto to call his own institution’s forecast, of a 6.4% economic contraction, too pessimistic. Economists polled by the bank see a 5.6% drop. Either way, it’s well ahead of major regional peers, Mexico and Argentina, which are forecast to shrink by 9.8% and 12.5%, respectively.

On Thursday, the national statistics institute provided more evidence Brazil’s economy was on the mend: services sector activity rose in June from the previous month for the first time since January, as Brazilians return to restaurants and start flying again.

Investors have taken note and driven Brazil’s benchmark stock index more than 30% higher over the past three months.

Yet economists worry the continued spread of the virus could derail Brazil’s economic recovery. And many caution that better-than-expected numbers may have more to do with cash-assistance programs than lax restrictions.

What Our Economist Says

“Neither will Brazil break the trend of the virus as it should have, nor will it have the economic rebound that policies would suggest. People going back to the streets doesn’t mean they are back to consuming.”

--Adriana Dupita, Latin America Economist at Bloomberg Economics

Moreover, output alone doesn’t determine a healthy economy. The virus’s toll in Brazil, with over 3 million registered cases and more than 100,000 deaths, has even some of the country’s most market-minded politicians questioning President Jair Bolsonaro’s insistence on jobs first.

Further complicating matters, two senior aides to Economy Minister Paulo Guedes resigned on Tuesday, raising concerns about his ability to deliver the ambitious economic reforms he says are needed to sustain growth in the long term.

While Brazil’s far-right leader has pushed to reopen businesses no matter the cost, governments across Latin America are all grappling with just how much of their economies should stay open -- and how to keep them afloat when they close -- as they battle the spread of the virus.

“You have all these different experiments in the region with different degrees of lockdowns but with little success,” says Liliana Rojas-Suarez, Director of the Latin America Initiative at the Center for Global Development. “The problem is it’s just not feasible.”

Covid Hotspots

Five Latin American countries now rank in the top 10 for Covid-19 cases, with Argentina close behind. Brazil stands out not just for its caseload, but for its leader’s vehement opposition to quarantine measures even after getting sick himself.

Bolsonaro, 65, has flouted widespread medical advice calling for the use masks and social distancing, and pushed hydroxychloroquine, an unproven anti-malarial drug, as an effective cure. Critics say he’s caused a public health crisis by downplaying the dangers of the illness while rushing to get the economy rolling again.

“Lockdowns kill,” he said last month. “Without salaries and jobs, people die.”

Saving jobs is particularly tricky in Latin America, where more than half the workforce is off-the-books. Barclays estimates that over 27 million have been lost already. Further complicating matters, populations are increasingly urban and many live day-by-day.

Restrictions in Brazil were mostly felt in its big cities, but Bolsonaro has clashed with governors and mayors who have tried to keep Brazilians home, complicating any enforcement effort.

Elsewhere, governments imposed far stricter measures.

Lockdowns are still in place in Chile and Argentina. Both capitals, Santiago and Buenos Aires, tried lifting quarantines in the early days of the pandemic only to enforce them again. Colombia and Peru kept their economies closed through April. And Mexico shuttered its entire construction and manufacturing industries until June.

Temporary Boost?

Brazilian authorities have provided some $50 billion to informal workers to offset the economic pain of the pandemic. The stipends, nicknamed “coronavoucher,” are set to expire next month and are largely credited with saving the country from a longer, deeper recession.

Like his Brazilian counterpart, Mexico’s President Andres Manuel Lopez Obrador has resisted cracking down on businesses and citizens violating health officials’ recommendations. But his administration has favored austerity over injecting cash into the economy and now faces a much bleaker outlook.

In Chile, where thousands have been arrested for breaking curfew, the government has pursued one of the most aggressive stimulus packages in the region and allowed Chileans to draw on their pensions. That’s helping to push up forecasts of a 6.5% contraction, which would be one of the strongest in the region after Brazil, even as large parts of its economy stay shut.

But given the uncertainty surrounding the virus, economists won’t pick a winning strategy just yet. And besides, as Alberto Ramos, head of Latin American research at Goldman Sachs Group Inc. points out, any rebound is relative.

“Because these numbers come after such a massive collapse, there is no reason for a victory lap,” he said.

©2020 Bloomberg L.P.