INSIGHT: Covid, end of aid may cause Brazil Q1 GDP to contract

Author: Al Greenwood

2021/01/28

HOUSTON (ICIS)--Economists are warning that Brazil's economy is slowing down and may even contract in the first quarter, the result of emergency aid expiring and the coronavirus spreading.

A nationwide trucker strike could cause even more problems, especially for the chemical sector, which relies heavily on trucks to deliver feedstock and ship finished goods.

The economic outlook puts Brazilian policy makers in a dilemma. Extending emergency aid may limit the duration of any contraction, but it would further stretch the country's finances and add to debt.

Maintaining the status quo would avoid piling on more debt and breaking the nation's spending cap. However, it would increase the likelihood that the economy will shrink in the first quarter. The contraction could continue into the second, causing a technical recession.

ECONOMIC OUTLOOK
Capital Economics expects that Brazils economy will contract in the first quarter because of the severity of the pandemic, said William Jackson, chief emerging markets economist for the firm.

Brazil is among the countries where new strains of the coronavirus are spreading, and the nation's Ministry of Health confirmed a case of someone becoming re-infected with it.

Local government will likely adopt more social distancing and other restrictions on movement to control the spread of the disease.

Vaccines could also help, but Brazil's programme has faced problems acquiring syringes and materials needed to make the shots, Jackson said.

Another blow to the economy came when Brazil's emergency aid package ended in 2020, Jackson said.

In all, Brazil spent about 8% of GDP on economic stimulus, and the effort contributed much to Brazil's recovery.

The country's economy shrank by a much slower rate, 4.5%, than Latin America and the Caribbean as a whole, at 7.4%, according to forecasts from the International Monetary Fund (IMF).

Brazil will have a hard time beating out its peers in 2021 because it cannot afford to fund another ambitious stimulus programme without breaching its spending cap.

The country will likely honour it so it can stabilise its public debt, prevent a sharp rise in bond yields and keep investors tranquil, Jackson said.

Already, the economy is showing signs of strain. Inflation is running at 4.52%, above the midpoint of the central bank's target of 2.25-5.25%. The exchange rate remains above reais (5) to the dollar.

With that, Capital Economics expects Brazil's GDP to grow by 3% this year, in line of an increasing number of economists in Brazil.

The business newspaper Valor Economico quoted several as saying that GDP could grow by just 2-3%.

OTHER CHALLENGES
Jackson noted other challenges. The pace of economic reforms has slowed down, with proposals addressing taxes and central-bank independence stalling. As the 2022 general election approaches, these reforms will become harder to adopt.

The rally in prices for commodities such as soybeans and iron ore has played out and Capital expects prices will fall back, Jackson said. In any case, the service sector is the largest part of Brazil's economy, and it is getting hit by the coronavirus. Unless services rebounds, Brazil's recovery will likely remain slow.

A risk that Brazil may avoid is a nationwide trucker strike that could take place on 1 February.

The unions calling for the strike are the National Shipping Association in Brazil (ANTB) and the National Council of Highway Goods Transport (CNTRC).

Among the truckers' grievances are fuel prices and a freight rates.

Such strikes are especially disruptive because Brazil relies heavily on trucks to deliver raw materials to plants and to ship out finished goods.

A nationwide strike that took place in May 2018 caused chemical plants to shut down and output to plummet.

In all, industrial production to fall by about 10%, Jackson said.

The government, well aware of the disruption caused by the last strike, may choose to come to terms to prevent another one.

If the strike does take place, it would compound the effects that the coronavirus could have on economic growth.

Demand for plastics and chemicals typically rises and falls at multiples of GDP, so a slowdown in economic growth would also drag down chemical demand.

On the other hand, the changes in buying habits among consumers have caused a rise in demand for plastics used in personal protective equipment (PPE) and packaging.

Likewise, more people are working from home in Brazil, and this has led them to take on home-improvement projects. The result has increased demand for chemicals used to make building materials.

By Al Greenwood

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