Brazil economy: the titan of South America taking off again

22/12/2019

According to the OECD, Brazil's economy is gradually recovering, due to internal factors. Confidence is improving after progress in approving economic reforms in Congress and investment has regained its strength after falling for two quarters.

Brazil economy: the titan of South America taking off again. Photo: Pxfuel
Brazil economy: the titan of South America taking off again. Photo: Pxfuel

At the end of the last decade, Brazil had one of the highest growth rates in its history, as its GDP increased by 7.5%. During this period, the country consolidated its position as one of the most prosperous economies in the region, recording five consecutive years of economic expansion of over 4%. However, those times are behind us and the forecasts for this year are only 1%: the IMF and the World Bank are projecting a 0.9% variation in GDP, while ECLAC corrected its perspective from 0.8% to 1% for this year.

Despite this scenario for 2019, the beginning of the second decade of this century is encouraging, as the IMF and the World Bank expect GDP to grow 2% in 2020. In this way, the giant of South America seeks to take off again.

According to the OECD, Brazil's economy is gradually recovering, due to internal factors. Confidence is improving after progress in approving economic reforms in Congress and investment has regained its strength after falling for two quarters.

For Fabio Giambiagi, chief economist of Brazil's National Bank for Economic and Social Development (BNDES), there are two reasons for Brazil's slight GDP growth in 2019. One is the very low growth in productive capacity, due to years of falling investment, which has affected the same capacity for growth on the supply side.

"The second reason is a consequence of the effects of the collapse of the modus operandi of the large construction companies as a result of the Lava Jato operation, which caused a nosedive in construction and is causing the return on investment to be very slow. However, it is important to note that the outlook for 2020 looks better," he said.

The Lava Jato case was the biggest anti-corruption investigation in Brazil's history that led former President Luiz Inácio Lula da Silva to jail. It also prompted investigations into Odebrecht for offering bribes in more than 12 countries.

José Augusto de Castro, president of the Brazilian Foreign Trade Association (AEB), has told several of the country's media that Brazilian foreign trade will close 2019 at below capacity due to a drop in both exports and imports. Likewise, the economic situation in Argentina has impacted the trade of products and services, such as vehicles manufactured in the local territory.

Among the reforms that can give Brazil a boost are labor and pension reforms. The first one came into force four months after its approval (July 2019) and seeks to combat one of the most worrying figures in the country: unemployment. According to figures from the Brazilian Institute of Geography and Statistics (IBGE), the rate of this item stood at 11.6% in the quarter ending in October, that is, 12.4 million Brazilians were looking for work. The aim of the reform is, therefore, to make hiring more flexible in order to increase employment. However, workers and labor unions see it as a threat to their rights.

The pension reform, which was approved in October, seeks to save R$870 billion (US$213 million) from state coffers by raising the retirement age for women to 62 and for men to 65.

Investment in the metro and transportation systems

Sacyr Ingeniería e Infraestructuras and the Brazilian construction company Ferrera Guedes were awarded the construction of the Fortaleza Metro East Line (Brazil). The project will take 48 months to complete and has a budget of 1.47 billion Brazilian reals (approximately US$388 million). The project includes 7.3 kilometers of tunnel, of which six kilometers will be executed by tunnel boring machines, as well as four underground stations. The government said that, for the next five years, they will make an investment of US$6,015 million.

Social crisis halts tax reform

After the pension and labor reforms were approved, the president of Brazil, Jair Bolsonaro, had planned to process a tax reform in Congress. However, due to the social turmoil in several countries in the region, he decided to postpone it, so that the opposition would have no reason to take to the streets to march, as has happened in Peru, Chile, and Colombia. What did push Bolsonaro was to approve this year the reform of the pension system, which increases the minimum retirement age for men and women.

The factors that slowed growth this year

High unemployment

Although unemployment in Brazil fell by two-tenths of a point in the August-October quarter, to 11.6%, due to an increase in informal work and the number of self-employed workers, the figure is still high: some 12.4 million are seeking employment.

Informal work increases

Although unemployment in Brazil fell by two-tenths of a point in the August-October quarter, to 11.6%, due to an increase in informal work and the number of self-employed workers, the figure is still high: some 12.4 million are seeking employment.

Falling exports

Sales of Brazilian products to Argentina, its third largest trading partner worldwide and first in the region, have slowed from US$11.307 billion in the first eight months of 2018 to US$6.778 billion in the same period in 2019.

Corruption

The aftermath of Operation Lava Jato can still be felt. The country's largest corruption case drove away foreign investment and caused more than one company to retract its entry into the country, especially in the infrastructure sector.

Low productivity

Fabio Giambiagi, the chief economist of the Bunde, indicated that an important factor was the low growth of the country's productive capacity. In the third quarter of 2019, Brazil's industrial production fell by 1.2% compared to the same period last year.

By Mexicanist Source La Republica