Brazil government sees a 4.7% drop for 2020 GDP and backs off from creating a broader cash transfer program

COVID-19 impacts on demand and inflation can still change the official scenario

Street vendors sell their goods at a closed commerce area in Rio de Janeiro's downtown, Brazil September 1, 2020. Photo: Reuters/Ricardo Moraes
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Brazil’s Economy Ministry on Tuesday kept its forecast for a record 4.7% fall in gross domestic product this year, predicting that the recovery already underway from the depths of the pandemic-fueled crisis will accelerate as the year goes on.

The ministry said it expects growth in the third quarter to be led by industry, agriculture and trade, which will help drive an overall GDP expansion of 7.3% from the preceding three-month period.

Brazil’s economy shrank by a record 9.7% in the second quarter, figures earlier this month showed, a bigger fall than economists had expected.

Also on Tuesday, President Jair Bolsonaro said that the government will no longer create the Renda Brasil, a broader cash transfer program, and it will continue only with Bolsa Família.

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“Until 2022 in my government it is forbidden to talk about Renda Brasil. We will continue with Bolsa Família and that’s final,” said the president in a video published this morning on his social networks.

The decision to bury the program, which the government saw as the way to attract the loyalty of the poorest families, came after a series of tough measures that the economic team was analyzing to try to finance the program. Among them, freeze pensions for two years, untie the readjustment of the minimum wage of the lowest pensions and tighten the rules for granting the Benefício de Prestação Continuada (BPC), a benefit paid to the elderly and people with disabilities in low-income families.

READ ALSO: Brazil economy back to 2009 size after record 9.7% slump in second quarter

Uncertainties and high inflation

The unchanged 2020 outlook came as a slight surprise, after Waldery Rodrigues, special secretary to the ministry, had indicated earlier this month that the forecast could be revised up.

Still, a contraction of 4.7% is smaller than the average forecast in the latest weekly central bank survey of economists, of around 5.1%, and far less gloomy than the International Monetary Fund’s projection of a 9.1% crash.

The ministry noted that Brazil’s dominant services sector, which accounts for around 70% of all economic activity, has been slow to recover from the pandemic shock, but will start to show a “more vigorous” performance in the fourth quarter.

“According to our projections, the services sector will be stronger from October onwards, and will lead (the economy’s performance) in the fourth quarter,” economic policy secretary Adolfo Sachsida told reporters in an online press conference on Tuesday.

The ministry also maintained its 2021 GDP growth forecast of 3.2%. While the outlook is still subject to a high degree of uncertainty due to the COVID-19 crisis, Sachsida said next year’s projection was still on the conservative side.

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Quick and strong government action earlier this year to support the economy helped mitigate the pandemic’s affect. But the “only” way Brazilians will enjoy sustained economic well-being and the benefits of increased productivity is through “structural reforms and fiscal consolidation.”

The ministry also raised this year’s inflation forecast to 1.83% from 1.6% and lowered next year’s to 2.94% from 3.24%. Both would still be well below the central bank’s official goals of 4.0% and 3.75%, respectively.

Sachsida said the recent rise in food prices is temporary and does not mark the start of an inflationary phenomenon, hailing the central bank’s efforts in keeping inflation low.

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