Brazil's Gross Domestic Product (GDP) contracted 0.1% in the 2nd quarter of 2021, the Brazilian Institute of Geography and Statistics (IBGE) reported Wednesday.
According to the new data, Brazil's economy is slowing down after having advanced by 1.2% in the first 3 months of the year, completing 3 consecutive quarters of growth.
Despite the setback, the Brazilian GDP remained at the pre-pandemic levels between December 2019 and January 2020, although 3.2% below its historical pinnacle in the first quarter of 2014.
Nevertheless, analysts had not expected red numbers. The negative surprise is mainly explained by the retraction of agriculture, industry and investments, and by stagnation in household consumption.
“We are comparing this result [interannual] with the worst quarter of the pandemic,” IBGE's Rebeca Palis said.
In the first semester of 2021, the GDP accumulated a YoY increase of 6.4%. In the accumulated result for the four quarters ended in June, growth was 1.8%.
The biggest fall was in agriculture (-2.8%), affected by crop failure, followed by industry (-0.2%), which has been affected by the lack of inputs and the high cost of raw materials.
On the other hand, services grew by 0.7% compared to the first quarter, due to the reopening of the economy from COVID-19 measures.
Among industrial activities, the worst performance was that of manufacturing industries (-2.2%) and the activity of electricity and gas, water, sewage, waste management activities (-0.9%). On the other hand, there was an increase of 5.3% in extractive industries and 2.7% in construction.
Energy consumption is following the economic recovery, but the costs, with the activation of thermoelectric plants due to the water crisis, are pulling down the value added to the GDP, Palis explained.
Among the three large sectors of the economy, only services did not get back to pre-pandemic levels, still operating 0.9% below the 4th quarter of 2019. Industry and agriculture were, respectively, 1.6% and 3.3% above the level observed before the health crisis. “Remembering that agriculture has not suffered almost any effect from the pandemic,” Palis went on.
Regarding the low performance of services, Palis highlighted that activities listed as other services were 7.2% below the pre-Covid level, emphasizing the effects of the health crisis on the economy. The other services are those more dependent on face-to-face assistance and carry a very large weight within the sector itself. In other words, they are the ones that are pulling the sector down, ensuring the return of services to the pre-pandemic level, she said.
The positive highlights of the services sector in the composition of GDP in the second quarter were information and communication activities (5.6%), and other activities (2.1%), which encompass services provided to families. Trade (0.5%), real estate activities (0.4%), financial activities, insurance and related services (0.3%) and transport, storage and mail (0.1%) also increased.
Only public administration, defence, health and education and social security remained stagnant (0.0%) in the quarter, compared to the first 3 months of the year.
Household consumption showed a zero variation compared to the first quarter, while investments fell by 3.6% and government consumption rose by 0.7%. High unemployment and high inflation since the beginning of the year had a direct negative impact on the economic recovery.
“Despite the government assistance programs, the increase in credit to individuals and the job market improvement, the real wage has been falling, negatively affected by the increase in inflation. Interest rates also started to rise. This impacts household consumption,” said Palis.
She also recalled that household consumption accounts for more than 60% of GDP and was still 1.6% below pre-pandemic levels. “We have been noticing an improvement in the job market, with job creation, but there has been no growth in the wage bill. And inflation has a very relevant impact on income,” she highlighted.
Palis also pointed out that high inflation had been driven, since the end of last year, by the rise in food and beverage prices, and this year it has also been greatly impacted by higher fuel prices.
Brazil's trade balance increased by 9.4% in exports of goods and services in the 2nd quarter, the biggest change since the 1st quarter of 2010. According to IBGE, the main highlight was the soybean harvest stimulated by favourable prices. On the other hand, imports dropped 0.6% compared to the first 3 months of the year.
Investments measured by gross fixed capital formation (GFCF), which gather company and government spending on machinery and equipment, infrastructure, construction and innovation, fell again (-3.6%) after 3 consecutive quarters of going up.
The investment rate in the second quarter of 2021 was 18.2% of GDP, against 15.1% in the same period of the previous year (15.1%), but still far from the level of 2013 (20.9%).
Palis said that the negative results of investments, as well as of imports, compared to the first quarter of the year, reflect the incorporation of goods by Repetro, which was “still impacting these two components in the first quarter. Now in the second quarter, this entry by Repetro has decreased a lot, reflecting negatively when comparing the rates of the second quarter against the first. As time goes by, this influence diminishes”, she pointed out.
The savings rate hit a record in this second quarter. It was 20.9%, compared to 15.7% in the 2nd quarter of 2020, and was the highest ever recorded in the historical series that, for this indicator, started in 2000. According to the researcher, this result is directly related to the effects of the pandemic on the consumption, above all, of services, which are paralyzed by the measures to restrict the movement of people. Services are consumed more by the richest families who, do not revert them into the consumption of goods, but into savings.
Economy Minister Paulo Guedes said that the study released by the IBGE shows that the economy went sideways in the second quarter, with stability. “The economy is back in V, we are growing again. Today there was a figure, practically aside, 0.05% [decrease], which is rounded to 0.1%. If it were 0.04% [indentation], it would be [rounded to] zero,” Guedes pointed out.
In a statement, the Economic Policy Secretariat (SPE) of the Ministry of Economy assessed that the negative result of GDP in the second quarter occurred in the three-month period with the highest number of deaths by Covid-19 and with relevant sectorial effects, adding that the growth of GDP accumulated in 4 quarters shows the good position of the Brazilian economy.
More relevant than observing the growth number is to analyze its quality. Important pro-market laws and fiscal consolidation measures are being approved, laying the foundations for the country's sustainable growth in the long term, he said.
Despite the advance of vaccination against Covid-19 and the end of measures to restrict time and public in much of the country, persistent inflation, political tension and fiscal risks (sustainability of public accounts) have in recent weeks raised concerns over the pace of the recovery and caused downward revisions to economic forecasts.
The financial market's expectation for economic growth in 2021 was reduced from 5.27% to 5.22%, according to the latest Focus survey by the Central Bank. For 2022, the average projection is at 2%, but some analysts already see it closer to 1.5%.
In 2020, in the first year of the pandemic, the Brazilian economy dropped 4.1%, registering the biggest contraction since the beginning of the current historical series of the IBGE, which started in 1996, which removed Brazil from the list of the 10 largest economies in the world.
Economists believe that the heating of the services sector should help improve the labour market and ensure that the GDP of the third and fourth quarter remains in the blue, but they warn of the risks of new stops in the recovery, including the prospect of further increases in the basic interest rate (Selic), a worsening of the water crisis and the political environment, due to repeated threats by President Jair Bolsonaro to democratic rule.