Amid the political tensions and widespread protest throughout the country, the economic outlook of Brazil has been numb this year as well. The projected growth rate of Brazil will remain at 0.8% in 2023, which is substantially lower than last year.
A country with a history of economic crises has once again witnessed a blow in its growth due to several political and economic factors at play within and outside the country.
Protests, rising global inflation, the Russia-Ukraine war and the strengthening value of the US dollar have adversely impacted Brazil’s employment growth, consumer spending, real wages and investments across sectors.
However, Brazil witnessed an upward growth trajectory in March 2023 for the first time since October 2022, partly due to the new fiscal framework and rise in overall trade surplus, thus showing positive signs of moderate improvement in the overall economy.
This article will critically analyse the current condition of Brazil’s economy and what lies ahead for the 5th largest country in the world.
Brazil’s economy is projected to slow down from 3% growth in 2022 to 0.8% in 2023, and several factors at play led to such a steep downfall.
Decline in Employment
There has been a sharp spike in the overall unemployment rate in the country as the economy has been declining since Covid-19.
Overall unemployment spiked to 8.6% in February 2023 from 7.9% in December 2022, resulting in 1.5 million people losing their jobs in November 2022. As a result, the real wages of employees have also declined for the first time in February 2023 since April 2022.
Higher Interest Rates
The Central Bank of Brazil has been constantly increasing the interest rates to cull out inflation. However, this has increased the borrowing cost for businesses and diminished consumer spending as well.
People are now more inclined towards savings due to inflation, declining wages and no job security. The current policy rate remains at 13.75% and has been the same since August 2022.
As far as investments are concerned, Brazil’s high-interest rate, declining consumer expenditure and political upheaval have increased the risk for investors in the market. For instance, Brazil is ranked 91st out of 153 countries as per the GlobalData Country Risk Index.
The country’s score (49.4 out of 100) is higher than Latin America’s (48.6) and the World’s Average (45). However, when it comes to macroeconomic risk and social and demographic structure, Brazil is still performing better than Latin America.
In January 2023, massive protests broke out between the factions of ex-President Bolsonaro and the current President, Luiz Lula da Silva.
Lula won the election by a slight margin in October 2022, but the results were not accepted by Bolsanaro, causing widespread outrage among his supporters and leading to massive rioting and pillaging in the capital of Brazil, Brasilia.
Although the protests are now stopped, the economic ramifications will be witnessed in the form of resentment among the people already suffering from inflation and unemployment.
The Bright Side
Rise in Tourism
According to the World Travel and Tourism Council (WTTC), the tourism industry accounted for 6% of Brazil’s GDP in 2021 and created 1 in every 11 jobs in the country.
After Covid-19 and recent domestic upheaval, Brazil’s tourism industry has been adversely affected in the last few years.
This seems to be changing as the economy opens up, and it is projected that Brazil will witness an upsurge of travellers from 2.22 million in 2021 to 3 million in 2023. The revenue is projected to reach $16.36 Billion in 2023 at an annual growth rate of 3.80%.
As per Global Data, Brazil’s economy is expected to grow better than its Latin American peers. For instance, Argentina and Chile are projected to grow at 0% and -0.6% respectively this year.
The higher growth rate is projected due to an increase in exports as the Chinese economy opens up, which accounts for 30% of Brazil’s overall exports.
Due to the Russia-Ukraine War, exports of essential food items, including sugar, soybean, edible oils etc., will rise as it is set to fill the supply gap created due to the war. Brazil is already the largest exporter of Soybeans, and this year, it has also witnessed a better harvest.
The strengthening dollar and a decline in the supply of essential food items due to the Russia-Ukraine war have led to a rise in inflation worldwide, and Brazil is no exception.
The Central Bank of Brazil, Banco Central do Brasil (BCB), is trying to clinch down on inflation by raising interest rates from 2021, earlier than any major economy.
The current policy rate of BCB is 13.75% which has not changed since August 2022. As a result of these policy measures, the core inflation, excluding food and energy, has gone down to 7.3% in March 2023 from 10.9% in June 2022.
As we know, real wages are declining, which has led to a decline in spending, causing a further decrease in the inflation rate. Therefore, as inflation declines, it has led to a rise in consumer confidence, which is a positive sign for the economy.
Improved Fiscal Framework
The Government has been struggling to balance its fiscal policy since Covid-19 because it decided to financially support the masses and ease the burden on the population.
As a result, the Government had a deficit of 4.5% of its GDP, whereas the total debt was equivalent to 70% of its GDP.
An improved fiscal framework will keep fiscal spending in check while ensuring a reduction in the overall deficit and debt in the country. Though it still needs to be approved by Congress, it is a welcome move to maintain its fiscal stability by 2025.
In 2022, Brazil almost doubled its Foreign Direct Investment to $90.6 billion, of which the major chunk went into the energy and technology sector. During the Pandemic, Companies have preferred Brazil for their investment due to higher internet adoption and technological infrastructure.
With rising tension between the US and China, Brazil has gained ground as US companies are diversifying their operational and manufacturing base from China to other nations, including Brazil. Similarly, Chinese companies have shifted their operations to Brazil due to higher scrutiny by the US Government over the threats of spying and allied practices.
The overall growth trajectory of the country still remains low due to inflation and high-interest rates set by BCB, causing a decline in spending. Still, the long-term growth trajectory remains to be positive, and once the inflation reaches the Central Bank’s target, it will decline its policy rates, causing an uptick in the growth rate of the country.
With the domestic economy still growing at a smaller pace, there is still a ray of hope that the growth trajectory of Brazil will catch pace by the end of this year.
This will happen at a time when major economies of the world are set to decline due to the global economic meltdown.
However, the current Government’s pro-left policies and free schemes might be a bone of contention in the effective implementation of the new fiscal framework if it is passed successfully.
A country with a $1.89 trillion economy has the potential to transcend from the recessionary forces and witness a spike in its growth if domestic politics remains stable and sound policies based on economic indicators rather than populist measures are successfully implemented.