Analysis: Impoverishment generates new recession in Brazil

Once again, the Brazilian economy has technically entered a recession. After a first quarter of strong expansion (1.3%), we had two consecutive declines of -0.4% and -0.1% in the second and third quarters, respectively.

Contaminated by the good performance at the beginning of the year, until mid-2021 the expectation that the Brazilian economy had entered a more robust recovery was still predominant, and projections above 5.5% for 2021 were not uncommon.

The optimism was, to a large extent, based on a higher expected growth for those activities with the greatest interaction between people and which, therefore, benefited from the increasing relaxation of the restrictive measures in force throughout the pandemic. Among such activities, retail trade and, mainly, services stand out.

Despite the strong second wave of the pandemic that hit the country at the beginning of the year, the volume of retail trade actually showed an upward trend, growing by 5.5% between January and July. The upward trend in services was even more intense and lasted a little longer, extending until August, with an accumulated real expansion of 7.2%.

In the view of analysts, with the acceleration of vaccination from the beginning of the second half of the year, an even greater boost to growth was expected in recent quarters, mainly due to what we could call the “euphoria effect”, resulting from greater control of the pandemic and the growing return to normality.

However, what actually occurred was a reversal in the upward trend, precisely during the period of greater optimism among sanitarists, due to the important advance in the number of people immunized.

One of the main explanations for the recession confirmed by today’s disclosure is undoubtedly the impoverishment process that has been reducing the purchasing power of a significant part of the population. The maintenance of the high unemployment rate (12.6% in September) has caused an impressive precariousness of work, with significant reductions in wages offered by employers – wages that the vast majority of those in the unemployment queue cannot refuse.

The situation becomes even more dramatic when one observes the increase in prices on the domestic market. While the average nominal wage dropped 9.1% between January and September, in the same period the accumulated inflation measured by the IPCA was 6.9%, which continues to expand, and should surpass 10% by December. Falling nominal wages associated with the strong acceleration in prices mean a brutal contraction in purchasing power, particularly of the less favored.

This situation has been preventing a more consistent dynamic of resumption of trade and services. It is noteworthy that a significant part of the services is linked to higher income classes (tourism, hotels, restaurants, information services), which are less affected by the aforementioned retraction in the average purchasing power.

Not by chance, services in the third quarter still registered growth at the margin of 1.1%. In this sense, the fall in GDP would have been even greater had it not been for the expansion in demand for services by the richest.

Under the current circumstances, a more consistent recovery necessarily depends on a reversal of the context of sharp decline in the purchasing power of the middle and low-income groups, allowing for a sustained resumption of consumption.

Inflation control through the escalation of the basic interest rate is not the solution to reversing the current situation. The origins of the inflationary process are supply shocks (national and international) in different sectors, which should be addressed by specific sectorial measures.

The vast majority of Central Banks have decided to tolerate a little more inflation and are not raising interest rates at this time. The current rate of increase in the Selic rate tends to further deteriorate purchasing power, increasing credit costs, in addition to being extremely harmful to the business decision for new productive investments.

Anyway, the prognosis is not favorable. Growth in 2021 will be below 5%, with increasing chances of stagnation in 2022. The basic income policy of R$400 proposed by the government is undoubtedly important, but not sufficient for the real needs of the Brazilian economy.

The sustained expansion of per capita income (and purchasing power) depends essentially on a resumption of investments (public and private) in infrastructure and technological development, accompanied by the recovery and strengthening of industrial capacities.