Brazil’s economy continues to face strong headwinds in 2022, despite performing better than expected in the first few months of the year.
The economy expanded by 1% in the first quarter of 2022 compared to a year ago, according to the state’s statistics agency (IBGE), and unemployment was 10.5% in the three months ending in April. The numbers might not seem good, but they are an improvement on initial forecasts.
The International Monetary Fund had forecast growth for 2022 at 0.3% and most analysts saw the country falling back into recession. Unemployment, while still in double digits, is at its lowest rate in seven years.
“Talk about negative growth is pretty much over and the outlook is better than a few months ago. While the forecast has improved, we are still looking at very low growth,” says William Jackson, chief emerging markets economist at London-based Capital Economics.
Walter Molano, a US-based chief economist at BCP Securities, says growth forecasts would likely increase for the second half of the year. While he began the year forecasting gross domestic product (GDP) contracting by 1.2%, he now has it at 0.5% and said it could tick up to 1–2% if the current trends stick.
“I think Brazil is turning a corner. GDP is better and the pandemic is now under control. It has a long way to go, but conditions have improved,” Mr Molano says.
The coming months will be crucial for the country. The economy could take advantage of a supercycle in commodities as it did a decade ago, but it is still struggling against domestic and international conditions as Brazilians prepare to elect both a president and Congress in October.
Inflation and wages
Daniela Campello, a professor at the Getulio Vargas Foundation in Brazil, who is finishing a fellowship at the Washington DC-based Wilson Center, says current conditions have led to a rising tide of frustration among Brazilians.
“We had a slowdown after the last commodity boom and then the pandemic, with increased poverty and falling wages, and now there is inflation. All of this adds up to a very tough scenario,” she says.
The key points are inflation and wages. Inflation in April rose by 1.1% compared to the same month a year ago, and was up 12.1% annualised until the end of April, according to the statistics agency. April marked the eighth consecutive month of double-digit inflation, which is now at its highest rate in 19 years.
Inflation is being pushed along by internal factors, including a drought and energy prices, and by external factors, such as the supply chain disruption and spikes in prices worldwide caused by the war in Ukraine.
“The big issue right now is inflation. We do not have the kind of inflation like we had before, but it is still a hot topic because of our past,” says Gustavo Franco, a former governor of the Central Bank of Brazil. “The good news is that we are not doomed to repeat hyperinflation.”
He adds that he expects the central bank to raise the benchmark interest rate a few more times this year, but with smaller increments. He adds, however, that it would be difficult to get inflation down to the bank’s target of 3.5% for the year.
The bank raised the interest rate by 100 basis points to 12.75% in May. The rate had dropped to a historic low of 2% in March 2021 as part of the state response to the pandemic.
Mr Franco says an important change that should not be overlooked is new independence enjoyed by the central bank. Legislation approved in February 2021 has made it impossible to change the governor for political reasons.
“The governor cannot be removed, which helps eliminate the temptation of adopting populist measures to favour the incumbent president,” he adds.
Ms Campello says rising inflation was compounded by shrinking wages. In April, wages averaged $545 per month, similar to the first quarter of the year, but were down nearly 8% from the same month in 2021. The IBGE states that informal emplyment stood at 40% of the workforce.
The external factors impacting GDP growth and inflation are also having a positive impact on other areas of the economy. Brazil is a massive commodity producer, and one of the few emerging economies that is a powerhouse in agriculture, mining, and oil and gas.
Brazilian exports brought in $281bn in 2021, with 31% of that coming from China. The US was a distant second, receiving 11% of Brazil’s exports. Exports are continuing with that upward rhythm.
Foreign direct investment inflows in 2021 totalled $58bn — more than double that of the previous year, according to the government’s trade and investment agency (Apex-Brasil). The authorities expect the amount to be higher this year.
The economy expanded by 7.5% in 2010, during the post-financial crisis commodity boom. The boom this time, coming on the heels of the pandemic, is very different.
Ms Campello says that while the commodity sector is doing better than ever, “purchasing power has disappeared and this is what people are talking about. People do not care that Brazil is exporting more grain and meat, when they have to pay more each month for groceries and services.”
All about the politics
The second half of 2022 will be dominated by the October elections. While there are numerous candidates, the race is between incumbent president Jair Bolsonaro and former president Luiz Inácio Lula da Silva.
If no candidate receives a majority on October 2, the two top finishers will head to a runoff on October 30.
In addition to electing a president, Brazilians will also elect 27 of the country’s 81 senators, all 513 House of Representative deputies and 27 governors.
Mr Bolsonaro, a retired army officer, was the unlikely winner of the 2018 presidential elections. He came to power with a conservative social and economic plan, pledging to transform Brazil’s economy through tax and pension reform, and privatisation of state-run enterprises.
He managed to push the pension reform through Congress, which has 24 parties represented in the House of Representatives and 16 in the Senate. Some of these tax reforms and privatisations are just now starting to move forward.
Brazil’s Congress approved a bill in late May that would limit state sales tax to 17%. It would have an impact on inflation by lowering the cost of goods and utility rates.
In May, the government also received the green light to start the privatisation of one of the country’s major assets, the state power company Centrais Eletricas Brasileiras (Electrobras). The Bolsonaro government believes that it will be able to sell Electrobras quickly and would like to get it done before the October vote. The target price is $13.5bn.
In late May, the president took aim at Petrobras, Brazil’s giant state-owned oil company, once again. He said the government could split Petrobras into different units as a way of facilitating its privatisation, adding that since the company was not meeting its obligations specified in the constitution, it might as well be in private hands.
Mr Bolsonaro has been fighting with Petrobras since oil prices spiked, wanting the company to stop indexing domestic prices to the international market. He has changed the president of Petrobras twice since March, and removed energy and mines minister Bento Albuquerque in May for failing to freeze prices.
“Bolsonaro did not follow through on his promises to reform the economy and he has stepped back from some of the big ideas in this campaign,” Mr Molano says.
Mr da Silva — who governed Brazil for two terms, but was then jailed in a still unclear corruption case — is campaigning on a platform of boosting public spending. His campaign calls for a change to fiscal rules, specifically three laws that have guided the country since the 1990s, including one that limits budget increases to inflation and another that prohibits the state from incurring debt to cover current expenses.
Mr Molano says there is a great deal of concern around Mr da Silva’s pledge to change fiscal rules, as they “have stopped Brazil from making the mistakes of its past with huge debts”.
The country’s gross debt in April was equivalent to 78.5% of GDP, according to the central bank, falling back to the level it was at in April 2020 when the pandemic gripped the country.
Ms Campello says while both candidates pose risks, Mr da Silva has shown over the course of his career a greater willing to compromise. “Lula [da Silva] knows that there are constraints and that he has to work within [them],” she explains.
She adds that Mr Bolsonaro, although currently behind in the polls, could turn the race around if he manages to focus his campaign on the issues of reducing the size of the state and lowering taxes, which got him elected the first time.
Mr Jackson says while there is still a long way to go before the vote, concern among investors has moderated. He adds that Mr da Silva is not running as a far-left candidate and Mr Bolsonaro has also toned down his rhetoric.
“The candidates are proposing much different reforms to grow the economy and reduce poverty,” he notes. “The race is on, and it will depend on who is more convincing.”
