Consumers walk along a commercial street in Rio de Janeiro 09/16/2020. Photo: REUTERS/Ricardo Moraes/File photo

Brazil's GDP grows 4.6% in 2021, but the future scenario is clouded by fiscal pressure and the Russia-Ukraine crisis

The combination of persistent inflation, high-interest rates, and political uncertainties has made the market's vision increasingly distant from the Brazilian government's. The country is no longer among the ten largest economies in the world.

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In 2021, Brazil‘s economy recovered from the slump caused by the COVID-19 pandemic, advancing 4.6% over the previous year – the highest annual growth in 11 years, coming right after the biggest drop of 3.9% since 1996. The data were released by the Brazilian Institute of Geography and Statistics (IBGE) this Friday (4). The combination of persistent inflation, high-interest rates, and political uncertainties – now also in the international field, with the invasion of Ukraine by Russia –, however, has made the market’s vision increasingly distant from that of the Brazilian government.

Before last year, the highest annual growth ever recorded by the IBGE had occurred in 2010, when the country grew 7.5%. Despite the rise in prices and the reduction in workers’ income, the service and commerce sectors are recovering, albeit at a slower pace than previously predicted. Industry and agriculture, in turn, struggle with the lack of components and high costs, respectively, among other factors.

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Overall, the 2021 reading came in slightly worse than the Ministry of Economy‘s official projection of 5.1% growth. In addition, GDP is only 0.5% above the pre-pandemic fourth quarter of 2019, and 2.8% below the highest point in the historical series, in the first quarter of 2014, according to the IBGE.

Also this Friday, the IBGE revised figures for the first and second quarters of 2021: Brazilian GDP grew 1.4% between January and March (compared to 1.3% before) and fell 0.3% in the second quarter (previously – 0.4%). Compared to the fourth quarter of 2020, GDP expanded by 1.6%.

With a nominal GDP of $1.608 trillion last year, the country is no longer among the ten largest economies in the world, according to credit rating agency Austin Ratings.

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The country’s benchmark interest rate Selic left the minimum of 2% per year at the beginning of 2021 and is at 10.75%, in a cycle of monetary tightening promoted by the Central Bank to try to tame the rise in prices.

According to economists, the war could impose yet another headwind on the economy of Brazil and Latin America as a whole. The only counterpoint would be the jump in the prices of some commodities exported by the country and the region.

While developed countries have fiscal plumpness to delay as much as possible the withdrawal of stimulus measures and put the demand-supply relationship on the axis, emerging countries are forced to increase interest rates as the fastest way to stop the soaring prices. On the face of it, the actual recovery, economists say, will slowly start only in 2022 and (as always in Latin America) quite unevenly. According to UN‘s Economic Commission for Latin America and the Caribbean (ECLAC), Latin America faces its biggest fiscal challenge since the public debt crisis in the early 1980s, when the GDP fell by -6.1%.

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To Oxford Economics, the fiscal and monetary tightening that will come in 2022 already makes Latin America look at a recovery easily coming from the economy’s reopening in the rearview mirror. And even with this tightening, convergence to inflation targets will come slowly due to persistent imported inflation.

ECLAC‘s forecasts a 0.5% GDP growth for Brazil in 2022, while the IMF expects a 0.3% expansion and Oxford Economics stagnation.

Big national institutions like Itaú Unibanco are far less optimistic about Brazil’s economy in 2022. Itaú-BBA, the research arm of the country’s biggest bank, forecasts a 0.5% decline this year.

The Economic Policy Secretariat of the Ministry of Economy said this Friday that the normalization of supply shocks, the restoration of production chains, the improvement of the labor market, the reduction of hydrological risk, and the expansion of private investments support an economic growth in 2022 higher than projected today by the market. Until November last year, Jair Bolsonaro‘s administration was betting on a 2.1% advance for 2022. However, a new projection should come out this month.