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The political crisis surrounding President Michel Temer (front) could hurt Brazil's economic recovery, experts say. Finance Minister Henrique Meirelles in the background. (Photo: Brazil President's Office)
Wednesday, June 14, 2017

Brazil Economy: End of Recession?

Has Brazil pulled out of its worst recession ever?

Inter-American Dialogue

Brazil’s economy grew 1 percent in the first quarter as compared with the previous three-month period, officially ending the country’s worst recession on record and marking the economy’s first quarter-on-quarter growth following eight consecutive quarters of contraction. What factors were behind the return to growth this year, and what challenges lie ahead as Brazil navigates its ascent from recession? How can the government keep the economy from backsliding into recession? How will the current political scenario affect future economic stability in the country?

Marcos Vinicius Chiliatto Leite, economic affairs officer at the United Nations Economic Commission for Latin America and the Caribbean: The end of the recession is not yet clear on the Brazilian horizon. The 1 percent growth in the first quarter of 2017 after several periods of decline is the result of the external sector, driven by agriculture, which saw 13.4 percent growth in the first quarter. For 2017, the Brazilian Institute of Geography and Statistics projects an almost 30 percent increase in cash crops, mainly because of an abundant rainy season after a dry 2016. In addition to improvements on the supply side, a spike in commodity prices in the beginning of 2017, along with higher demand, drove this growth. Brazil, with more than 200 million people and an industrialized economy, cannot rely on the export of commodities for its development. Brazil’s strongest asset is its own people and domestic and regional markets, which still lack encouraging news. Household consumption and investment continue to fall, and unemployment remains unchanged. These weakening conditions pose a huge challenge to Brazilian industry, which also competes with Asia. In the first quarter, Brazilian industrial production marked a persisting decline of 0.7 percent (12 months accumulates -9.7 percent). Since foreign demand and agriculture explain most of the 1 percent growth, this shouldn’t be attributed to economic policy. It is not related to the fiscal austerity or the social security and labor market reforms. Less public spending and labor market flexibility will not solve the industry challenge. It may even worsen the country’s situation if it leads to lower wages and even lower household consumption. The country should move toward social equality to drive demand, together with a revitalized industrial development plan for boosting economic growth and structural change.

Paulo Vieira da Cunha, partner at Verbank Consulting, LLC in New York: Brazil’s economy grew 1 percent in the first quarter, but this is not the end of the recession. Data for the second quarter will likely return to negative numbers, and if the political crisis continues, so could the subsequent quarter-on-quarter seasonally adjusted numbers for 2017. A return of business confidence led to the steady pickup in activity since mid-2016. This, in turn, was due to the emergence of new economic teams, at the Ministry of Finance and the central bank, and to Temer’s ability to persuade his coalition to approve important measures in Congress. Meanwhile, the deleveraging of indebtedness by consumers and firms was proceeding. Together with a path to lower interest rates, an exceptional performance in agriculture in the first quarter and the promise of continued policy and legislative progress in tackling the country’s unsustainable buildup of public debt, the performance of Temer’s government sustained confidence. And confidence is key to an upturn in the flow investments, which dropped nearly 30 percent in volume since the previous peak in the first quarter of 2014. For the economy to return to sustained growth, the political crisis must end; hopefully it will soon, with the resignation of President Temer, followed by indirect elections in Congress, or alternatively, with a new president in 2019.

Monica de Bolle, non-resident senior fellow at the Peterson Institute for International Economics: Brazil’s first-quarter growth was essentially driven by bumper crops in soybeans and corn, as well as by recovering commodity prices. Agriculture recorded astounding growth rates of 15 percent relative to the first quarter of 2016, driving up economic activity. All other GDP components, however, remain in the red. Notably, consumption and investment have continued to contract, underscoring the weakness in domestic demand. It is therefore too soon to call an end to the recession. Moreover, with the worsening political crisis surrounding President Michel Temer, it is possible that the country will post another contraction in GDP this year—there isn’t much that the government can do to contain this risk, given eroding governability and a lack of room for economic maneuver. The best one can hope for is that with falling inflation, some real wage gain may give support to household consumption. Brazil’s ongoing drama is unlikely to be resolved before the 2018 general elections. 

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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