Opinion: While the world is in recession, Brazil seems to be an island

By Felippe Hermes

(Opinion) While the US, Germany, and China are experiencing a slowdown or even recession, the GDP of the Brazilian economy is being revised upward.

“Vera Cruz Island”, “Vera Cruz Land,” and “Parrots Island” are some of the names given to the Brazilian territory after its discovery in 1500. The origin of the name “Brazil”, traditionally associated with the pau-brasil, a wooden tree with intense red color, would not be known until years later, in 1527.

Etymology aside, economics often cites the term “island” as a symbol of isolationism. And as far as anything suggests, this may reflect part of the Brazilian scenario this year.

Economies such as the US, European, and British are already circling recession, or “negative growth,” as the White House calls it. Meanwhile, we see a wave of upward GDP revisions in Brazil.

Still forecast at -0.5% in October 2021, Brazilian GDP should be around 2% in 2022. And there are many very favorable indicators for the country.

Tax collection, a thermometer of economic activity, shows that the country reached the R$1 trillion (US$191 billion) mark in taxes collected on May 3 this year, a figure 16 days earlier than in 2021.

Meanwhile, unemployment fell to 9.8%, the lowest level since 2015.

Traditionally, employment is the last indicator to be affected by a recession and the last to respond during periods of growth.

To this figure, we can add income stability, which, if not positive, at least shows that income is no longer falling, which was the case after the end of aid during the pandemic.

The retail sector provided the biggest surprise in this regard, which recorded a 22.3% increase in its nominal sales (excluding inflation) between March 2021 and March 2022.

As a percentage of GDP, the retail sector recorded an increase of 2.3% this year.

The gross fixed capital formation ratio, a nice term for “investment,” remains at 18.7%, a decline from 2021 (19.2%) but still above pre-pandemic levels and similar to 2014.

The difference, however, lies in the composition of investments. In contrast to 2014, most investments in 2022 are made through free loans, i.e., those not controlled by government measures such as the Investment Sustainability Program (PSI), through which the BNDES has driven up the country’s investment rate.

This situation contributes to a certain fiscal looseness. After seven years of deficits, the federal government is expected to record a primary surplus this year, thanks to the tax burden and revenue increase.

This figure contributes to a less pessimistic fiscal outlook despite the higher tax payments, avoiding a scenario of exploding public debt as projected amid the pandemic.

Not all the numbers are positive, however. The Brazilian interest rate is once again the highest in the world when inflation is considered.

If we take the inflation forecast for the next 12 months, Brazil today has an interest rate of 7% per year, while in the United States it is -4%.

This brutal difference was one of the reasons why the Real did not follow the path of other currencies against the dollar in 2022, such as the Euro, which for the first time in history, was quoted below US$1.

Europe even saw its first interest rate hike since 2011, yet interest rates remain at 0% while inflation is at 8.1%. It means that if you buy a European government bond for €100 (US$101), you will get €91.9 the following year.

Brazilian indicators point to a positive scenario compared to the rest of the world. However, the Brazilian economy is also facing challenges, such as the slowdown of the Chinese economy.

In 2022, China recorded the lowest growth since the beginning of the historical series. It means that the Chinese will demand fewer Brazilian products such as soy and iron ore.

Ironically, the recession in the US has international capital flowing into the US itself and leaving riskier places like emerging markets.

However, looking at the US scenario, it is hard to imagine that the Federal Reserve will be able to keep interest rates high for a long time. Today, the US national debt stands at 130% of GDP. To reduce this figure, there is only one remedy: inflation.

Like the Brazilian government, the US government has increased its revenues by raising prices and reducing the deficit in government budgets and the debt to GDP ratio in two ways.

The deficit is reduced as more taxes are collected, and GDP is increased as it is also adjusted for inflation.

Brazil may feel the effects of this global slowdown in the second half of the year, which would mean a lower “burden” for 2023, meaning that we will probably start next year with a tendency toward less growth.

Contracted investments, such as the R$828 billion from concessions and privatizations, can mitigate this slowdown, as they are contractually binding. However, they represent less than 10% of the country’s total investment over the next ten years.

Given the current spending scenario, and regardless of who is elected, we should also expect some more conservative signs on the budget in 2023, at least until the new government signals whether and how it will reform the spending cap.

We will see the end of a forced reduction in tax rates, which will most likely not decrease further (at least in 2023, as the STF has already decided to keep tax rates at 17% starting in 2024).

The current data helps to ease the situation of the population, which is still getting used to the brutal loss of purchasing power due to the devaluation of the real, but it urges caution given the external scenario and the budget juggernaut in an election year.

Felippe Hermes is a journalist and co-founder of Spotniks.com.