Brazil’s economy entered a technical recession in the third quarter, because soaring inflation hindered its pandemic recovery.
The third-quarter data released on Thursday showed that GDP contracted 0.4% and 0.1% from the previous quarter. Compared with the third quarter of last year, the economy grew by 4%.
The main reasons for the contraction were a drop of 8% in agriculture affected by the unprecedented drought and a 9.8% drop in exports of goods and services. Industry remained stagnant, while the service industry grew by 1.1%.
“The economy has basically stagnated. We have reached the level before the outbreak, but there has been no growth since then, and there is no sign of growth,” Mauricio Molon, chief economist at Logus Capital in Sao Paulo Express.
Latin America’s largest economy quickly rebounded from the initial impact of Covid-19, and GDP in the first quarter of this year returned to the level before the pandemic at the end of 2019.
However, since then, the recovery has lost momentum, and some economists predict a contraction next year. The October presidential election may also bring uncertainty.
Brazil’s Finance Minister Paulo Guedes remains bullish Tell The British “Financial Times” recently stated that Brazil will “shock the world again” and continue its “V-shaped recovery.”
However, many people questioned his department’s forecast for growth of more than 5% this year and more than 2% next year. Most economists expect that Brazil will end this year with a growth rate of 4.8%, and will either stagnate or only grow slightly next year. Credit Suisse and Itaú Unibanco, Brazil’s largest bank, forecast a contraction of 0.5% next year.
“Covid is no longer our main problem. Our main problem now is inflation. Fernando Genta, chief economist at XP Asset Management, said that due to exchange rate uncertainty and fiscal uncertainty, this stems from Domestically, but we are also importing inflation from abroad.
The Brazilian Central Bank announced the biggest interest rate hike in nearly 20 years in October, trying to Moderate inflation, Has reached nearly 11%, diluting income and exacerbating dissatisfaction.
By the end of this year, the benchmark Selic interest rate is expected to reach 9.25%, higher than the current 7.75% and 2% earlier this year. However, these efforts by the central bank to control prices may affect growth next year by reducing economic activity.
Molon said that the economy may stagnate in 2022 due to the dual pressure of monetary policy tightening and declining consumer and business confidence.
“We don’t have the same impulse from commodities, income is being diluted by inflation, and the labor market is still weak,” he said.
Due to the uncertainty of next year’s presidential election, the negative outlook is further complicated. Although these two front-runners are well known, neither the current right-wing president Jair Bolsonaro and the former left-wing president Luis Inacio Lula da Silva are not loved by the Brazilian business community.
Many people expect Bolsonaro to give up financial integrity and distribute cash to the poorest people in Brazil to win votes. Lula’s economic policy is not yet clear, although he publicly opposed the privatization of state-owned enterprises and government spending ceilings, the latter being considered a key fiscal pillar.