Business

Brazil enters recession as inflation engulfs economy

Brazil’s economy entered a technical recession in the third quarter as soaring inflation hampered the pandemic’s recovery.

Third-quarter data released on Thursday showed gross domestic product shrank 0.1% from the previous quarter, when it fell 0.4%. Compared to the third quarter of last year, the economy grew by 4%.

The decline was mainly due to an 8% drop in the agriculture sector, which has been hit by an unprecedented drought, and a 9.8% drop in exports of goods and services. Industry remained stagnant, while services rose 1.1%.

“The economy has basically stalled. “We reached pre-Covid levels, but since then there has been no growth at all and there is no indication that growth is coming,” said Mauricio Molon, chief economist at Logus Capital in São Paulo. .

Latin America’s largest economy quickly recovered from the initial impact of Covid-19, with GDP in the first quarter of this year returning to where it was before the pandemic hit in late 2019.

Since then, however, the recovery has waned and some economists forecast a decline next year. The presidential elections in October also risk bringing uncertainty.

Paulo Guedes, Brazil’s finance minister, remains optimistic, speak The Financial Times recently suggested that Brazil would “surprise the world again” and continue its “V-shaped recovery”.

However, many question the ministry’s forecast of growth of more than 5% this year and more than 2% next year. Most economists expect Brazil to complete this year with a 4.8% expansion and stagnant or only mild growth next year. Credit Suisse and Itaú Unibanco, Brazil’s largest lender, forecast a decline next year of 0.5%.

“Covid is not our main problem anymore. Our main problem right now is inflation. This is domestically sourced due to exchange rate volatility and fiscal uncertainty, but we are also importing inflation from abroad,” said Fernando Genta, chief economist at XP Asset Management.

Brazil’s central bank in October announced its biggest interest rate hike in nearly 20 years in an attempt to tame inflation, has gone up to almost 11%, depressing earnings and fueling discontent.

By the end of the year, the benchmark Selic rate is expected to hit 9.25%, up from 7.75% currently and 2% earlier this year. However, these central bank efforts to rein in prices are likely to weigh on growth next year by dampening economic activity.

Molon said the economy is likely to stagnate in 2022 as a result of two pressures: tightening monetary policy and declining consumer and business confidence.

“We don’t have the same impulse from commodities, incomes are being depressed by inflation and the labor market is still weak,” he said.

The negative outlook is further compounded by the uncertainty associated with next year’s presidential election. While both frontrunners are well known, neither Jair Bolsonaro, the current right-wing president, or Luiz Inácio Lula da Silva, a former left-wing president, are beloved by the Brazilian business community.

Many expect Bolsonaro to abandon his fiscal attitude and hand cash to Brazil’s poorest to win votes. Lula’s economic policies are ambiguous, although he has voiced opposition to the privatization of state-owned companies and limits on government spending, which are seen as key fiscal anchors.

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