ECONOMY BRAZIL
No signs of improvement President Jair Bolsonaro has failed to enact many electoral promises
B
razil’s economy activity index, which is an effective proxy for gross domestic product (GDP), fell 0.13% in the April-June period compared to the first three months of the year (and just 1% growth for the whole of 2018), according to the country’s central bank. This would indicate that Brazil most probably fell into recessionary territory in the second quarter. The bad news of these numbers are added to by persistently high unemployment and weak inward investment in the face of the global slowdown. Estimates for 2019 full year GDP growth have now been scaled back to under 1% and from to 2.5% to 2.2% for 2020. A big problem for President Jair Bolsonaro’s administration is severely weakened consumer demand. The government’s plan to try and boost spending is to give workers access to cash from a severance fund combined with a cut in the benchmark interest rate by the central bank. The bank has indicated that further rate cuts may be on the way over the rest of the year. The real has dropped close to 3%, largely on fears of what the ongoing US-China trade war will mean for Brazil’s economy. The weaker currency could potentially fuel future inflationary pressures later in the year by making Brazilian exports by major category – July 2018 to June 2019 Category
% of total
Commodities
50
Manufactured Goods
36
Semi-manufactured Goods
13
Other
1
Source: Brazilian Ministry for Industry, Foreign Trade and Services
ISSUE THREE 2019
imports more expensive and most major companies report instituting a hiring freeze for the rest of the year. Many of Brazil’s structural problems remain undealt with, despite the many pre-election pledges of the Bolsonaro team and economy minister Paulo Guedes. Little to nothing has been done to deal with the country’s infamous bloated pension system, necessary measures to control debt and initiatives to attract inward investments. All of this indicates that more bad news may be forthcoming at the end in September when the latest economic numbers are indicated while leading economists in Brazil believe that the failure to enact pension and other economic reforms will keep business confidence and investment subdued through to next year. To boost the economy Bolsonaro is hopeful that the trade deal between the South American Mercosur trade bloc and the European Union after two decades of
negotiation will help lift the economy and also have a ‘domino effect’ that will spur a faster trade deal with the US. However, as a member of Mercosur, Brazil can’t sign an agreement with the US on its own Argentina, Paraguay, and Uruguay must also agree the terms. Yet Brazil is the leading economy in the group comprising 75% of the Mercosur’s GDP; 67% of its imports; and 71% of its exports. Bolsonaro has been preparing for a US-Mercosur trade deal by getting rid of some outdated regulations that could hold up trade talks, including multinational telecom investment regulations and legislation involving streaming TV shows. It is important to highlight some Brazilian success stories this year. Car production in Brazil has jumped 14.2% and sales grew by 9.1% in the year to July 2019. This is both a domestic consumer and export story as Brazil’s car exports to Argentina rose sharply. ●
9