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Brazil enters recession as inflation grips economy

The Brazilian economy entered a technical recession in the third quarter as surging inflation choked off its pandemic recovery.

Third-quarter data released on Thursday showed a 0.1 per cent contraction in gross domestic product from the previous quarter, when it shrank 0.4 per cent. Compared with the third quarter of last year, the economy expanded 4 per cent.

The contraction was driven primarily by an 8 per cent drop in agriculture, which has been affected by an unprecedented drought, and a 9.8 per cent decline in the export of goods and services. Industry remained stagnant, while services grew 1.1 per cent.

“The economy has basically stagnated. We reached the pre-Covid level, but since then there has been no growth at all and there is no indication that growth will come,” said Mauricio Molon, chief economist at Logus Capital in São Paulo.

Latin America’s largest economy had rebounded quickly from the initial impact of Covid-19, with GDP in the first quarter of this year returning to where it was before the pandemic struck at the end of 2019.

Since then, however, the recovery has lost steam and some economists have forecast a contraction next year. Presidential elections in October also threaten to bring uncertainty.

Paulo Guedes, Brazil’s finance minister, has remained bullish, telling the Financial Times recently that Brazil would “surprise the world again” and continue its “V-shaped recovery”.

However, many question his ministry’s forecast of more than 5 per cent growth this year and more than 2 per cent next year. Most economists expect Brazil will round out this year with a 4.8 per cent expansion and either stagnate or grow only slightly next year. Credit Suisse and Itaú Unibanco, Brazil’s largest lender, forecast a contraction next year of 0.5 per cent.

“Covid is not our main problem any more. Our main problem now is inflation. This has domestic roots due to exchange rate uncertainty and fiscal uncertainty, but we are also importing inflation from abroad,” said Fernando Genta, chief economist at XP Asset Management.

Brazil’s central bank in October announced its biggest interest rate rise in almost 20 years in an attempt to tame inflation, which has reached almost 11 per cent, diluting incomes and fuelling discontent.

By the end of the year, the benchmark Selic rate is expected to reach 9.25 per cent, up from 7.75 per cent at present and 2 per cent earlier this year. These efforts by the central bank to rein in prices, however, are likely to affect growth next year by reducing economic activity.

Molon said the economy will probably stagnate in 2022 as a result of the twin pressures of tightening monetary policy and declining confidence among consumers and businesses.

“We don’t have the same impulse from commodities, income is being diluted by inflation, and the labour market is still weak,” he said.

The negative outlook is further complicated by uncertainty regarding next year’s presidential election. While both frontrunners are well known, neither Jair Bolsonaro, the incumbent rightwing president, nor Luiz Inácio Lula da Silva, a former leftwing president, are beloved by Brazil’s business community.

Many expect Bolsonaro to abandon fiscal rectitude and hand out cash to Brazil’s poorest in order to win votes. Lula’s economic policies are unclear, although he has spoken out against the privatisation of state companies and a government spending cap, which is considered a key fiscal anchor.

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