5 things: Brazil’s economic downturn and what to expect going forward

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Brazil’s economy has had a tough time of it so far this year. The truckers’ strike, the depreciating real and the uncertainty regarding presidential elections have all contributed to Brazil’s economic woes in 2018. In this post, Senior Economist Angela Bouzanis answers some key questions regarding Brazil’s economic outlook as we head into 2019.

1. Brazil’s economic outlook has worsened considerably since the start of 2018. What has caused more pessimistic view on economic outlook?

The unexpected nationwide truckers’ strike over diesel in May–June was a shock to our economic forecasts and caused analysts to substantially downgrade their projections for Brazil’s economy due to the consequent widespread economic disruptions. On top of this, a less supportive external environment due to tighter global financial conditions and higher oil prices has also weighed on the country’s outlook, along with lacklustre economic data.

2. How did the truckers’ strike earlier this year impact Brazil’s economy?

The truckers strike caused widespread disruptions to the Brazilian economy, ultimately denting growth. The Central Bank’s economic activity indicator recorded the worst drop on record in May, industrial production plummeted at the fastest pace in nearly 10 years and exports of goods also plunged as the strike prevented goods from reaching the country’s ports. Moreover, inflation also spiked in June as goods shortages drove up prices. However, most of the effects of the strike were largely temporary and economic data for the more recent months has stabilized.

3. There has been significant uncertainty regarding the potential outcome of Brazil’s presidential election and what policies will be pursued by the new administration. How has this affected the economic outlook this year? 

The election has created a great deal of uncertainty over Brazil’s future policy and economic trajectory. Corruption scandals, epitomized by the Lavo Jato (“Car Wash”) investigation, combined with an entrenched economic crisis, have decimated most of the country’s traditional political elite, opening the field for relatively unknown contenders as voter disenchantment has soared. The uncertain political atmosphere has taken a toll on economic sentiment, likely boding poorly for investment. In addition, politics, along with a broader emerging-markets selloff, have caused the real to plummet to levels not seen in years. This will amplify price pressures going forward, and likely ultimately lead to the Central Bank hiking rates in the coming year, reducing support for the recovery.

4. What challenges does Brazil’s economy face in the over the next few years?

A high level of public debt is one of the key challenges facing the economy, and policymakers need to work on improving public finances to bring the fiscal deficit down. More broadly, bringing about a stronger recovery after the worst recession in the country’s modern history, as well as modernizing the economy and boosting its future growth potential.

5. Is there anything to provide some optimism regarding the Brazilian economy?

The current account deficit has narrowed substantially in recent years and is fully financed by strong inflows of foreign direct investment. While the country also holds a large volume of international reserves which can help act as a buffer against economic turbulence.

Brazil economic outlook

Brazil’s prospects were downgraded for the fourth month in a row following a modest Q2 GDP output. In addition, a less supportive global backdrop and the weakening of the real cloud the country’s outlook. A market-friendly outcome to the election remains crucial to ensuring a sustainable recovery. FocusEconomics panellists now see the economy growing 1.6% this year, down 0.1 percentage points from last month’s forecast. Next year, GDP is seen growing by 2.5%.

Source: Focus economics

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