Brazil’s economy probably rebounded at a record quarterly pace in July-September and was on track for a better start to 2021 than previously thought, as businesses and households recovered from the first surge in COVID-19 cases.
But on a year-ago basis, gross domestic product (GDP) in Latin America’s No. 1 economy is still expected to shrink, as well as in the current quarter and modestly in the first three months of 2021, marking five straight quarters of contraction.
So far, the recovery has been powered by record low interest rates and a huge increase in federal government spending to counter the economic devastation from the novel coronavirus pandemic, which has left a death toll of almost 170,000 in Brazil, second only to the United States.
Brazil’s GDP in the third quarter is forecast to have grown at a record 9% clip compared with the second, which was the worst on record, contracting 9.7%.
Reinforcing a view that families and companies were getting back to normal and were less in need of state assistance, a majority of respondents to the poll said consumer spending and investment likely drove the expected surge in growth.
But that would still leave GDP down 3.5% compared with the same quarter a year earlier, according to the median estimate of 30 economists polled Nov. 16-20, still deep in recession. The growth data will be released at 9:00 a.m. (1200 GMT) on Dec. 3.
With private activity speeding up, President Jair Bolsonaro faces the challenge of tightening the fiscal purse even as unemployment is rising and there is no guarantee that a second round of infections will be avoided.
“Other than the risk of a second coronavirus wave, the government will have to start indicating its commitment regarding the future of Brazil’s public debt,” said Victor Beyruti, an economist at Guide Investimentos, adding: “excessive spending just made things worse from the fiscal point of view and now more than ever, reforms are necessary.”
Estimates for an expected 2.6% fourth-quarter contraction and 0.4% shrinking of growth in January-March next year were shallower in a poll in October, pointing to a quicker pickup following the latest progress in development of vaccines for the virus.
Just a small positive surprise in early 2021 would be enough to bring Brazil’s economy out of recession earlier than analysts expect.
Economy Minister Paulo Guedes said this month he planned to end special coronavirus measures on Dec. 31, but did not offer any clues over the future of a pre-existing welfare program whose potential expansion has kept markets on edge.
If confirmed in present budget talks, this could lead to a breach of Brazil’s strict ‘fiscal ceiling’, weighing on the real and pushing up inflation, potentially forcing the central bank to adopt a firmer stance that may in turn affect the recovery.