With no aid and under pandemic restrictions, economists see recession risk in Brazil

RIO DE JANEIRO, BRAZIL – Amid the pandemic upsurge, the Brazilian economy began 2021 with signs of a slowdown.

With no emergency aid for casual workers, discontinued in January, a contraction of the Gross Domestic Product (GDP) in this first quarter was already on the radar. Now, there is a growing number of analysts who expect a drop in the second quarter too, creating what the market calls a “technical recession”, when the economy contracts for two straight quarters.

With a poor Christmas for trade and with the service sector closing the year still far from normal, December signaled a slowdown in economic recovery. To make matters worse, the first January data, such as consumer and entrepreneur confidence indexes, road flow and vehicle sales, were not good.

A downward adjustment in growth projections for the first quarter, and for 2021 as a whole, had already been underway since last year. Now, the two straight quarters of contraction are in the scenario of BNP Paribas bank’s analysis teams, MB Associados consultants and the Brazilian Institute of Economics from the Getúlio Vargas Foundation (Ibre/FGV).

MB Associados began to project two consecutive GDP contractions, both in the first (-0.8%) and second (-0.3%) quarters. According to the consulting company’s chief economist, Sérgio Vale, one of the problems is that Covid-19 vaccination will take time to get off the ground.

“I am optimistic about the vaccines, and I believe the immunization program is likely to pick up speed down the road, with a potentially explosive impact up front, as more vaccines are emerging. Initially, however, production, supply procurement, political negotiations, everything was slower, and we could be in for a mild recession,” says Vale.

Other teams – such as Citi, Goldman Sachs, Fibra and Santander banks and Tendências consultancy – see the economy stagnating in the first half, coupled with a drop in GDP in the first quarter and low growth in the second quarter.

Pessimism

Economic data from last week corroborated the more pessimistic scenario. On Wednesday, the IBGE reported that retail sales fell by 6.1% in December compared to November, well below the most pessimistic projections. On Thursday, the negative performance of the services sector – a 0.2% drop against November, which was not surprising – confirmed the deceleration scenario. On Friday, the IBC-Br, the Central Bank’s activity indicator, came in with a 0.64% rise in December, but it was not enough to change the mood.

According to Bráulio Borges, senior economist at LCA Consultores, if the 3.14% growth rate of the IBC-Br in the fourth quarter 2020 over the third quarter is maintained, it would be enough for the GDP as a whole to grow by 3.5% in 2021. In other words, if growth is zero throughout the year, when comparing one quarter with the immediately preceding one, the economy would close with gains. This is what economists call “statistical loading”.

“Any growth in the 3.0% or 3.5% range (in 2021 as a whole) will mean that the economy will be going sideways. It would be the highest growth since 2013, but it would be illusory,” says Borges.

LCA Consultores is not yet projecting two straight quarters of decline, but, according to Borges, there may be a retraction in the first quarter. According to the economist, more worrisome than the late 2020 data showing a slowdown are the indicators that have already come out about January.

Road flow

There is plenty of evidence to show the lack of economic vitality at the start of the year. The ABCR Activity Index, calculated by Tendências consultancy using data from the highway concessionaires association, showed a 2.5% drop in vehicle flow on the roads in January, compared to December 2020. Compared to January 2020, there was a 8.8% plunge. New vehicle sales fell 11.5% compared to January 2020, according to FENABRAVE, the car dealerships association.

A preliminary view of the ICVA, a retail sales indicator created by the Cielo payment services company, shows that January “will follow the same level as December, which is not good,” says the company’s executive intelligence supervisor Gabriel Mariotto. The complete data will be released next week, but the executive anticipates that the worst results will come from bars and restaurants, and bookstores and stationery stores. Moreover, the North region “plummeted” in January’s ICVA.

For Mariotto, both the sectorial and regional perspectives suggest the impact of the pandemic upsurge. With the spread of covid-19 in several cities in Brazil, bars and restaurants were subject to operation restrictions at the end of the year. The performance of the North region was marked by the health crisis and the chaos caused by oxygen shortages in Manaus, the Amazonas state capital.

Uncertainties

The combination of the pandemic and the removal of government assistance through emergency aid may lead to economic contraction, but Bráulio Borges, senior economist at LCA Consultores, says there are uncertainties about the second quarter. For the economist, the reintroduction of the aid, under debate between the government and Congress, will set the tone – along with the repetition of measures such as anticipating the 13th salary of retirees or releasing FGTS (Employees Severance Indemnity Fund) withdrawals.

“In the short term, these are important support measures. Now, in the future, without them, the economy will rely on the labor market,” says Borges, noting that unemployment remains high.

Source: InfoMoney