Brazil - OECD Economic Outlook, December 2020

124 ď ź

Brazil Despite new infections and fatalities remaining high, the economy has started to recover across a wide range of sectors. GDP growth is expected to be 2.6% in 2021 and 2.2% in 2022, but activity will still fall short of pre-pandemic levels by late 2022. Inflation will remain below target and high liquidity provision, including through record-low interest rates, will support investment. Fiscal vulnerabilities have been exacerbated by the necessary policy response and public debt has risen. A failure to continue structural reform progress could hold back investment and future growth.

The strong fiscal and monetary policy response managed to prevent a sharper economic contraction. A temporary emergency benefit has supported over 67 million low-income households, cushioning the impact on household incomes and poverty. As the recovery will take time and some jobs may not return, well-targeted improvements in social protection would be warranted. Reallocating some current expenditures and raising spending efficiency would allow such improvements to be financed, while simultaneously resuming the fiscal adjustment underway before the pandemic. Structural reforms to enhance domestic and external competition and improve the investment climate could raise productivity, while better professional training would allow more people to seize new economic opportunities.

Brazil 1 Activity has partly recovered Index Jan 2015 = 100 110

Confidence has improved Index Jan 2015 = 100 160

Central Bank activity index Industrial production

Consumers

Services

Businesses

100

140

90

120

80

100

70

80

60

2015

2016

2017

2018

2019

2020

0

0

2015

2016

2017

2018

2019

2020

60

Source: CEIC; Central Bank of Brazil; and Refinitiv.

StatLink 2 https://doi.org/10.1787/888934217912

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020

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Brazil: Demand, output and prices 2017

2018

Current prices BRL billion

Brazil GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

2019

2020

2021

2022

Percentage changes, volume (2000 prices)

6 583.3 4 245.1 1 327.8 958.8 6 531.6 4.4 6 536.0 824.4 777.1 47.3

1.2 2.1 0.4 3.7 2.0 -0.4 1.6 3.4 7.7 -0.5

1.1 1.8 -0.4 2.3 1.4 0.2 1.6 -2.5 1.1 -0.5

-6.0 -7.0 -1.6 -10.2 -6.4 -0.8 -7.2 1.4 -6.2 1.1

2.6 3.8 -0.1 -0.4 2.3 0.1 2.5 5.3 4.3 0.3

2.2 2.2 -0.4 5.6 2.1 0.0 2.1 4.0 4.0 0.1

_ _ _ _ _

3.4 3.7 2.9 -7.1 -2.2

4.2 3.7 3.8 -5.9 -2.7

4.0 2.7 1.2 -16.9 -1.2

2.0 2.5 1.9 -7.6 -1.1

2.9 3.2 2.9 -6.7 -1.0

Memorandum items GDP deflator Consumer price index Private consumption deflator General government financial balance (% of GDP) Current account balance (% of GDP)

1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 108 database.

StatLink 2 https://doi.org/10.1787/888934217931

Brazil 2 Fiscal outcomes are affected by the recession % of GDP 0

Real interest rates and inflation have come down

% of GDP 110

-3

100

-6

90

-9

80

-12

70

-15

60 ← Primary fiscal balance

-18 -21

← Interest balance Gross public debt →

← Headline fiscal balance

2015

2016

2017

2018

2019

2020

Y-o-y % changes 20

% 10

← Headline inflation Ex-ante real interest rate¹ →

16

8

12

6

8

4

4

2

50

0

0

40

-4

2015

2016

2017

2018

2019

2020

-2

1. The ex-ante real interest rate is calculated as the SELIC rate minus inflation expectations one year ahead.

Source: CEIC; Central Bank of Brazil; and Refinitiv.

StatLink 2 https://doi.org/10.1787/888934217950

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

126 ď ź

With most containment measures lifted, infections have stabilised at high levels After the first COVID-19 case in late February, cases and deaths increased rapidly and Brazil has become one of the global hotspots of the pandemic. The health system has faced serious shortages, especially in the public sector, on which two-thirds of Brazilians depend. Many fatalities have occurred among those waiting for admission into intensive care units. New confirmed COVID-19 infections and deaths peaked in August and have declined since, but remain high. While the central government has not taken any coercive lockdown measures, state and municipal governments kept many shops and public places closed from late March through July. These restrictions have been lifted by now, with the exception of school closures.

Schools are being reopened on a case-by-case basis across the country, with significant local variation, but some may not reopen at all during the 2020 school year.

The economy is recovering Following a weaker activity drop than in other countries in the region in the second quarter, principal short-term activity indicators now point to a fairly solid and broad recovery. Even services, which include sectors highly affected by the pandemic, such as tourism, entertainment, hotels and restaurants and personal services, have seen some noticeable improvements. Confidence has rebounded among consumers and businesses alike. Credit has increased markedly since the outbreak of the pandemic.

Lower employment, lower hours worked and significantly reduced earning possibilities for self-employed workers are still weighing on labour incomes and private consumption.

Fiscal and monetary policies have provided strong support to the economy The fiscal policy response to the pandemic has been one of the strongest in the region, with discretionary fiscal measures exceeding 8% of GDP and a strong focus on the most vulnerable households, including informal workers. A new temporary emergency benefit has been paid to over 67 million informal, self-employed or unemployed workers since April, amounting to USD 120 per month, or 57% of the federal minimum wage. It has now been extended to end-2020, at half its original level. This strong support, in combination with other expanded unemployment benefits for formal workers, has reduced poverty to a 40-year low and avoided a stronger decline in incomes and consumption. Policy support for small firms includes a publicly guaranteed low-interest credit line to cover wages for employees earning up to twice the minimum wage. Additional new corporate credit lines have been created by the national development bank. Direct spending on health and transfers to states and municipalities, which have the primary responsibility for financing public healthcare services, has been increased by around 2% of GDP. Declining inflation has been pushed down further by faltering domestic demand. Both headline and core inflation measures are now significantly below target, despite a recent uptick in food prices. Rate cuts of 250 basis points in 2020 have led to historically low nominal and real interest rates. Combined with regulatory measures that would allow additional credit extension of up to 18.5% of GDP, this will provide highly favourable conditions for private investment once confidence in the recovery strengthens and credit demand picks up.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020

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The economy will almost recover by end-2022 Fiscal support and the end of containment measures are underpinning a partial recovery of domestic demand in 2020. The announced withdrawal of emergency social benefits will dent this recovery somewhat in early 2021, before momentum returns given the prospect of greater availability of a vaccine against COVID-19. These projections will allow activity to return close to its pre-pandemic level by the end of 2022.

Exports will continue to benefit from recovering global demand for food and minerals. Manufacturing exports are limited by continuously weak prospects in neighbouring Argentina, the major destination for such exports. Import demand will pick up in line with domestic demand. A fairly stable current account deficit will continue to be covered by foreign direct investment inflows. Unemployment will peak in 2021 at almost 14%, before receding slowly amid a return of previously discouraged workers to the labour market.

Inflation is projected to remain clearly below target until 2022 when the target is lowered to 3.5%. This will likely call for a gradual withdrawal of the current strong monetary support in 2022.

Besides a resurgence of COVID-19 cases, stalling reform progress would be a major risk for growth and fiscal outcomes. The pandemic is expected to add 20 percentage points to the gross public debt ratio, which will reach 100% of GDP by end-2022. Against this complicated background, fiscal sustainability hinges on keeping the pandemic-related fiscal measures temporary and on resuming the fiscal adjustment in train before the pandemic. This in turn will require mandatory spending floors and other budget rigidities to be addressed, while reviewing staff spending, subsidies and tax expenditures. The political challenge behind these reforms is not trivial, but a failure would imply breaking the 2016 expenditure rule, one of the driving factors behind growing confidence and declining interest rates before the pandemic. Social discontent that affected several South American neighbours could also affect Brazil, possibly compounded by deteriorating social conditions from the pandemic and by corruption scandals that have eroded faith in public institutions. On the upside, faster reform progress or stronger growth in main trading partners, particularly the United States and China, would accelerate the recovery.

Given limited fiscal space, structural reforms are a key policy lever Productivity-enhancing structural reforms can go a long way to support the recovery. Better domestic regulation and closer integration into the global economy could boost competition, while simultaneously reducing the cost of intermediate and capital goods. Productivity could also benefit from better contract enforcement through a more efficient judiciary and lower tax compliance costs through a substantial overhaul of the fragmented indirect tax system, with a view towards a unified value added tax. Better and more professional training would allow workers to seize new opportunities arising from ongoing structural changes in the economy and facilitate the reallocation of resources. Social protection could be strengthened cost-effectively by building on existing cash transfer schemes. With higher participation thresholds and benefit levels, and a more rapid inclusion of new applicants, these could be transformed into a universal means-tested social safety net, including for informal workers. This would also allow reductions in non-wage labour costs of formal jobs and foster formalisation, because cash transfers are financed through general taxation rather than labour charges. Preserving valuable natural assets such as the Amazon rainforest for future generations will require stronger efforts to enforce existing laws, building on past progress in enforcement.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020