Brazil’s Economy Closes 2019 with Strongest Growth Since Crisis Began

RIO DE JANEIRO, BRAZIL – With the help of the release of resources from the Severance Premium Reserve Fund (FGTS), the Brazilian economy should record its best year-end since the recession began in 2014 and should start 2020 strong.

According to banks and consulting firms heard by the newspaper O Estado de S. Paulo, the Gross Domestic Product (GDP) may grow up to 0.8 percent in this last quarter, better than the previous quarter. Since the beginning of the crisis, the figure for the last quarter has varied between -1.3 and 0.3 percent.

Should business activity be maintained at the same pace as in the last quarter, it would advance three percent in one year. But the norm is for it to slow down somewhat between January and March – although many economists are optimistic for the beginning of 2020.

The latest labor market data support the view that the economy is gaining traction. Last week, the Brazilian Institute of Geography and Statistics (IBGE) announced that 99,000 job vacancies with a signed portfolio were created in November alone. In the year to date, there were 948,000.

“A rate of 80,000 job openings per month is compatible with a GDP of 2.8 percent,” says economist Luka Barbosa of Itaú Unibanco. However, he points out that it is not possible to estimate the pace of growth of the activity with job creation as the only indicator. “But the employment data show that there is an acceleration process.”

The FGTS withdrawals are primarily behind the extra boost this year. Santander, which projects a 0.8 percent increase in GDP for the last quarter, estimates that half of this is due to the FGTS.

The release of funds has mainly boosted household consumption which will grow 2.8 percent in the fourth quarter compared to the same period in 2018, according to data from the Brazilian Institute of Economics (Ibre/FGV). It should accumulate an increase of two percent in the year.

“In this fourth quarter, we are at the peak of consumption, which has changed direction. Early in the year, it was low,” says IBRE’s economist Silvia Matos.

Economist Alessandra Ribeiro, a partner of Tendências Consultancy, says that, precisely because the growth comes from the FGTS effect, some caution is needed with the last quarter’s economic indicators. “We have already seen that the economy inflated Michel Temer’s government when FGTS resources were released. But there is also no denying that the economic fundamentals now point to a better scenario”.

According to Alessandra, who forecasts a GDP of 0.7 percent in the fourth quarter, the first quarter of next year is expected to be even more buoyant due to the FGTS. For the period between January and March, the Tendências projection is 0.4 percent.

In addition to the boost in the economy in this year-end and early 2020, the release of funds from the guarantee fund should have a secondary effect by increasing consumer and investor confidence.

“This perspective may generate a permanent effect on the economy, but not in the same magnitude that the resources themselves generate,” says economist Lucas Nóbrega of Santander.

The FGTS, despite being the main cause, is not the only engine of Brazilian activity this year. Global economic stability and the drop in interest rates also contributed to this more optimistic scenario.

“If the SELIC (the basic interest rate) remains at 4.5 percent, it changes the dynamics of the consumer market. This impact is very strong and I think we are underestimating it,” says Roberto Padovani, chief economist at Banco Votorantim. Last week, Padovani changed his projections for GDP from 0.8 to 1.1 percent this year and from 2 to 2.5 percent in 2020.

The chief economist of MB Associados, Sérgio Vale stresses that in addition to the trade driven by the FGTS, it is possible to identify evidence of more consistent growth in other sectors, such as construction. “We closed 2019 better and we see a more relevant 2020, after three such feeble years”, he says.

“For the first time, we started a year well and we should be able to deliver a stronger result, excluding eventual setbacks, which were not few in recent years,” adds Vale, in reference to Joesley Batista’s denunciations against former President Michel Temer that stalled the Welfare reform, the truckers’ strike, the Argentine crisis, and the Vale tragedy.

However, Nóbrega from Santander points out that next year’s US elections could lead to instability in the international market, bringing a new setback for the Brazilian economy.

Source: Infomoney