Brazil's GDP probably crumbled 9.4% in second quarter, poll shows

Economic activity began to stir again with fiscal spending, but there are fears this approach could derail the country's finances if kept for too long

The Port of Santos, Brazil. REUTERS/Amanda Perobelli/File Photo
  • The latest GDP data, due for release September 1, are set to crank up a raging debate that engulfes Economy Minister Paulo Guedes;
  • Analysts now expect a contraction of 10.7% in 2020 versus a projected drop of 12.7% in May.

Brazil’s economy likely cratered 9.4% under the impact of the coronavirus outbreak in the country during the second quarter, the worst three-month period ever, a Reuters poll showed.

Economic activity began to stir again after President Jair Bolsonaro launched fiscal spending to deal with the aftermath of Covid-19, but optimism has been dented by fears this approach could derail his original austerity agenda if kept for too long.

Brazil has registered more than 3.6 million cases of the virus since the pandemic began, the world’s worst coronavirus outbreak outside the United States.

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The latest gross domestic product (GDP) data, due for release September 1, are set to crank up a raging debate about the extent of a vast initiative that is quickly eroding the stance of Economy Minister Paulo Guedes, a Wall Street favorite.

Brazil’s Economy Minister Paulo Guedes gestures during a news conference in Brasilia REUTERS/Adriano Machado

The soaring budget deficit has stoked concerns among economists, whose warnings are adding pressure on a government already facing criticism for its handling of a health crisis that has cost almost 115,000 lives.

GDP probably collapsed 9.4% in April-June in quarter-on-quarter terms following a 1.5% drop in the first quarter, according to the median estimate of 33 economists polled August 17-21. Forecasts ranged from -7.5% to -13.6%.

Almost all respondents to separate questions on the performance of GDP components viewed private spending and investment as factors dragging the economy in the second quarter, with incomes weakened by rising unemployment and companies holding back on capital spending.

Reflecting a nascent pickup from the initial paralysis, the estimated size of the fall in annual terms was cut for the second time, with analysts expecting a contraction of 10.7% versus a projected drop of 12.7% in May.

READ ALSO: Colombia’s GDP falls by 15.7% in the second quarter

“Emergency aid measures helped avoid a deeper reduction in consumer spending, particularly at the end of the quarter,” analysts at MB Associados in Sao Paulo wrote in a report last week.

Besides the contribution of higher public expenditure in Q2, analysts were expecting to see a boost from Brazil’s trade driven by a large currency depreciation as the pandemic unfolded.

“Strong commodity-based sectors like agriculture and mining performed relatively well”, MB Associados said. However, the deterioration in the public accounts and its political impact are starting to hurt local markets again.

After two months of calm, the real was sent into a tailspin on reports that, instead of realigning the budget, officials may scrap a key spending rule that is widely seen as a cornerstone of fiscal policy.

The rule is likely to be broken in 2021, putting Guedes in a difficult spot. Last week he said he had Bolsonaro’s support amid rising speculation that political demands for more spending to shore up growth could force him to quit.

Doubts about Guedes’ future have grown since two more of his special secretaries left the ministry and local media reported central bank president Roberto Campos Neto was being lined up to replace him.

“A shift to the kind of austerity that would placate Mr. Guedes looks increasingly unlikely,” Capital Economics analysts wrote in a report last week, adding he would stay on board “for now” after winning a tough battle in Congress.

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