WorldThreat of blackout, inflation and political crisis: the minefield for Brazil's economic...

Threat of blackout, inflation and political crisis: the minefield for Brazil’s economic recovery



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The Brazilian economy is recovering from the fall of 2020 with the covid-19 pandemic and registers a growth of 12.4% this quarter, compared to the same period in 2020, according to the Brazilian Institute of Geography and Statistics (IBGE). But the data released this Wednesday revealed a meager performance in the second quarter, with a 0.1% decline in economic activity between April and June compared to the previous quarter. The expectation is to close this year with a GDP around 5%, but from 1.5% to 2% next year, too low to recover losses during the covid-19 crisis.

“It was the most tragic quarter, when the pandemic hit more Brazilians,” said Economy Minister Paulo Guedes on Wednesday. “It was April, May and June this year, with the second wave. It was just when emergency aid, the expansion of assistance programs, came in again. We maintained fiscal responsibility on the one hand and the commitment to the health of Brazilians on the other,” he declared, according to the newspaper The globe.

The results reveal that Brazil is already bumping into many rocks along the way, posing a major challenge to the Jair Bolsonaro government. With just over a year of the 2022 presidential elections and with the popularity dwindling —in the last XP poll, 54% consider the administration to be bad or terrible—, the economy has become a minefield for the president. The recovery is taking place, driven by the rise in commodity prices, but it is uneven and does not include the poorest. On the horizon are inflation, driven by high food and energy prices, unemployment, a water crisis that could lead to an energy blackout, and coup threats that generate even more uncertainty in the economy.

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Inflation

According to the IBGE’s Broad National Consumer Price Index (IPCA), inflation in the last 12 months was 8.99%. This high started in the food sector, with the increase in demand for commodities and the devalued real pushing prices up. “Inflation ends up taking the purchasing power of that income that the family is used to receiving. These people consume less and economic activity is weaker”, explains Julia Braga, an economist at the Fluminense Federal University.

With the rise of the dollar, explains the economist, products in the production chain and intermediate goods that are imported end up becoming more expensive. There are also those produced in Brazil and exported, such as commodities, whose prices are determined in international markets. “So the producer will only sell on the domestic market at a price that is equivalent to what he could earn abroad,” he explains. Families have seen food such as rice, beans and beef become up to 50% more expensive in supermarkets. “There is this ripple effect that takes a lot out of the purchasing power of families,” he adds.

Blackout

Brazil is also at risk of a new energy crisis, which brings back the fear of a blackout and the possibility of energy rationing. The strong drought period depleted the reserves of hydroelectric plants, increasing generation through thermoelectric plants and the need to import energy. The result was a rise in electricity bill prices, which has been felt for a few months and should get worse this month. This Tuesday, the Minister of Mines and Energy, Bento Albuquerque, made an official statement on the national network calling for an “unpostponable” effort to reduce consumption, which will certainly impact companies.

The National Electric Energy Agency (Aneel) also announced a new tariff flag, called Water Shortage. The extra fee will be 14.20 reais for every 100 kWh consumed and will be valid from September 1st to April 30th, 2022. “This increase also affects the entire production chain,” explains Júlia Braga.

Political crisis triggered by the president

There is a consensus among specialists that the threats to democracy promoted by Bolsonaro have contributed decisively to feed the distrust of economic agents. The announcement of protests against the Supreme on September 7, insufflated by the president, mobilized various sectors of the economy to repudiate any gesture that goes beyond democratic limits. The escalation of the political crisis promoted by the president pressures the dollar and inflation upwards and scares away investments — and, consequently, more economic growth. As a result, the Central Bank began to raise interest rates in order to offer a greater reward to those who buy government bonds while controlling inflation. The Selic rate, which was at 2% between August last year and January this year, is now at 5.25%.

Unemployment

Despite the recovery of 12.4% of GDP compared to the same quarter last year, unemployment remains high and stood at 14.1% in the second quarter of this year, reaching 14.4 million Brazilians, according to the National Sample Survey of Continuous Households (Pnad), of the IBGE. In the previous sample, the rate was 14.6%. Despite the setback, the number is still very high. The underutilized population — that which is unemployed, who works less than they could, who did not look for a job despite being available for work, or who looked for a job but was not available for the job — totaled 32.2 million people.

According to economist Samuel Pessôa, from FGV, the recovery of the Brazilian economy affects mainly the more educated and formalized sectors, which are in agriculture, the financial sector, insurance companies, retail… But outside this recovery is a whole range of services that account for 15% of GDP and 30% of employment, half of which are informal. “This sector is still 10% below the pre-crisis level”, he explains. Like inflation, unemployment reduces the population’s purchasing power and makes the wheel of the economy turn less.

growing social inequality

This combination of uneven recovery, high inflation and unemployment impoverishes Brazil and has brought back the specter of hunger. “The growing inequality, in the short and medium term, limits the domestic market, in a way that generates disincentives for productive investment, since an important part of society sees its consumption capacity deteriorated, reducing demand”, explains economist Débora Freitas, from Federal Fluminense University. She explains that companies need to have good return prospects to make their investment decisions. Therefore, demand perspectives are fundamental.

“The increase in inequality today is very damaging to economic recovery. In the long term, the effects are of a tendency towards productive specialization, since, with a restricted internal market, the activities of exporting commodities, in our case, become, more and more, the most attractive option”, explains the economist . “The problem is that these activities fundamentally depend on international cycles and are quite income concentrators”, he adds. Inequality also brings “waste of talent due to lack of opportunities, which limits the growth of the country’s productivity and social cohesion”, as well as violence and democratic instability, a whole scenario that also scares away productive investments.

Public Accounts

In addition to the political turmoil, Bolsonaro and his economic team cannot guarantee that the fiscal rules will be respected. This, once again, increases uncertainties regarding the Brazilian economy and reduces expectations and investor confidence. “The balance of public accounts and the signaling regarding fiscal responsibility and the commitment to the spending ceiling is fundamental to ensure an environment of controlled exchange rate, inflation and interest”, explains economist Felipe Salto, executive director of the Independent Tax Institute (IFI), of the Federal Senate. “Without this, the trend of higher interest rates will persist, harming economic growth as early as 2022. The high risk framework also affects the quality of foreign capital entering the country and hinders initiatives linked to the expansion of investments and production”, he adds .

End of commodity boom

Although the economic recovery is driven by rising commodities, it is not clear whether prices will remain high until the end of the year. China is already beginning to adjust its demand. “With the high price of freight, Beijing started to control commodity prices,” explains Tulio Cariello, director of content and research at the Brazil-China Business Council (CEBC). In this equation, once again, the dry period in Brazil and the risk of a blackout, which doubly compromise the agricultural sector, which represents around 27% of the Brazilian GDP. There is a huge dependence on exports that can be even more expensive. Public and private investments are going through their worst years and, without investor confidence, without a clear fiscal policy, with a consumer market impoverished by high inflation and unemployment, there are few alternatives for Brazil to grow.

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