Brazil: Pandemic, inflation, and growth expectations | Calamatta Cuschieri

Notwithstanding the political turmoil, a caseload far surpassing last year’s pandemic peak, and a slow vaccination roll-out, several international banks and financial analysts have raised their forecasts for Brazil’s economic growth this year.

A revised GDP growth figure, now pointing to at least 4 per cent, comes after a closely watched central bank index of economic activity suggested that Latin America’s largest economy may have expanded in the first quarter.

In 2020, Brazil’s economy contracted 4.1 per cent and although most economists were expecting a recovery this year, the surge in infections plus an inoculation drive lagging behind the developed world, weighing on mobility, increased downside risks.

Coronavirus pandemic and resultant political turmoil

The second wave of coronavirus infections, particularly in the Amazonas state, pushed hospitals in the capital Manaus to their limits, and the country’s struggle with its vaccine roll-out proved worrisome.

Brazil - previously renowned for demonstrating outstanding leadership during a health crisis, became an international pariah amid the coronavirus pandemic. It recorded the second highest coronavirus-related death toll – more than 440,000 people, is lagging a good vaccination programme, and is still without an effective and coordinated public health response to the outbreak.

Although the infection rate has recently subsided, health experts fear Brazil’s coronavirus catastrophe may possibly worsen in the coming months.

Meanwhile, a parliamentary inquiry into the government’s response to the pandemic is expected to heighten political pressure on President Jair Bolsonaro.

At the end of April, the Senate initiated an investigation into Jair Bolsonaro’s controversial handling of the pandemic - often prioritising the economy at the expense of health, which is hurting his approval ratings for the upcoming general elections, scheduled to be held in October 2022. The inquiry could pave the way to Bolsonaro’s impeachment, which, although plausible, remains highly unlikely.

Inflation fears prompt Brazil to lift rates

In response to inflationary pressures - a function of; a weaker currency, lingering effects of emergency spending in response to the pandemic, and higher cost of goods, Brazil’s central bank raised its benchmark interest rate by a further 75 basis points, to 3.5 per cent. The second interest rate hike in 2021.

The Monetary Policy Committee (Copom) - the body of the Central Bank, which defines the basic interest rate of the economy, anticipates a similar rise in its June meeting to control inflation even as the economic recovery from the effects of the pandemic seem slower than previously estimated.

The Copom noted that despite an improved economic outlook, a worsening pandemic brought renewed uncertainty about the growth rate of the economy and the path of inflation. The Committee also emphasized that its view for its next policy meeting will continue to depend on the evolution of economic activity, the balance of risks, and inflation projections and expectations.

Growth expectations revised

Several international banks and financial analysts have raised their forecasts for Brazil’s economic growth this year. GDP forecast revisions, now pointing to at least 4 per cent, come after the Economic Activity Index suggested that Latin America’s largest economy have expanded in the first quarter of 2021.

In March, Brazil’s Economic Activity, albeit contracting, proved stronger than expected.

The index fell 1.59 per cent from a month earlier, reversing from an upwardly revised 1.89 per cent expansion in February, but fell less than market expectations of a 3.75 per cent contraction. The contraction followed 10 successive months of expansion.

Considering the January-March period, the index rose 2.3 per cent from the last quarter of 2020, easing fears of an economic contraction in the first quarter of 2021. Year-on-year, Brazil’s economy advanced a non-seasonally adjusted 6.26 per cent.

The better-than-expected economic data is one of the more recent signs that a coronavirus second wave may have been less damaging than initially feared.

The government’s official 2021 GDP growth forecast is 3.2 per cent, although Economy Minister Paulo Guedes pointed out that a growth of 4 per cent or more is indeed possible. The central bank’s forecast is of 3.6 per cent.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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