Brazil: will this emerging market ever emerge?
Will Brazil be an emerging market that never quite emerges? In the 2000s, the Latin American giant was making impressive progress in converging with developed economies. But since the global financial crisis of 2008, it has surrendered most of these gains. Today, the Covid-19 pandemic is hitting the country hard, threatening not only the health of its citizens but its reform momentum as well.
Brazil is not alone among the Latin American countries in failing to flatten the coronavirus curve. Only Peru and Chile seem to be managing to do this. But alongside Mexico, Brazil stands out as suffering excessively from political interference, with President Bolsonaro sowing division and weakening the de facto restrictions adopted to prevent the spread of the virus.
The outcome has been disastrous. The country’s total cases have hit 1 million with 80,000 deaths, and Brazil now accounts for almost 60% of the cases in Latin America. There are also concerns that the true infection rate is significantly higher than reported.
Despite Bolsonaro’s interference, virus-containment measures and private behavioural responses have had a severe impact on Brazil’s economy. Activity fell sharply in March, and available indicators suggest that April was the trough, as with most major economies. But unlike in other countries, the initial recovery in May was tepid. That being said, the manufacturing purchasing managers’ index and consumer-confidence data suggest that the economy mounted a more decisive recovery in June.
The precise magnitude of the second-quarter shock is very uncertain, but all forecasters are expecting a large hit to activity. We are tentatively expecting a quarter-on-quarter fall of around 12.5% in GDP growth. This is broadly in the mid-range of analysts’ expectations.
This economic shock comes at a time when Brazil’s labour market is yet to recover from the 2015/16 recession – a downturn that lasted for eight quarters. Although headline unemployment has – so far – risen by only 2 percentage point to 12.5%, there has been a very large fall in labour-force participation. Once this is taken into account, the true figure would be closer to 20%. Some 7.5 million jobs have been lost.
Given the failure to bounce back from the 2015/16 recession, further increases in debt and the process of de-globalisation that the Covid-19 crisis has accelerated, we don’t expect Brazil’s GDP to return to the levels of late 2019 until the end of 2022.
But even this picture may be optimistic. The ongoing failure to contain the coronavirus poses a sliding scale of risks for Brazil. This could allow a negative feedback loop to develop, leading to economic, political and social instability. One trigger for this could occur if intensive-care units reach maximum capacity in major cities, indicating that the country’s health system is about to break down. Failure to bring down unemployment could further polarise politics, with pressures for continued easing increasingly at odds with the need to flatten the curve.
The ongoing failure to contain the coronavirus poses a sliding scale of risks for Brazil.
Such an outcome would limit Brazil’s ability to eventually shed its ‘emerging’ tag. On current form, its chances of doing this don’t look great. Very few countries have managed to escape the middle-income trap and achieve advanced-economy status. Only the ‘Asian Tigers’, Israel and city-states such as Singapore have managed this so far. The progress that Brazil was making before the global financial crisis has been stymied by a combination of slower global trade, lower commodity prices, corruption and political malfeasance, and supply weakness caused by weak public investment.
The coronavirus shock makes all of these problems harder to solve. Deglobalisation pressures seem likely to accelerate, while US shale may keep oil prices low. Brazil’s higher debt levels reduce the country’s room for manoeuvre, even if the inflation and yield environment remains benign, which could limit much-needed public investment. Reform momentum also appears to be crumbling: even reformers seem to be trying to hold onto the progress made so far, rather than pushing for further change.
There are steps that Brazil could take to improve its growth prospects, however. It has a relatively closed economy with high trade barriers, and so it could still boost growth by opening up. Meanwhile, reform of its non-tradable sector could spur higher productivity – as by simplifying the overly complicated and distortive tax system, for example. But failure to reform will leave Brazil vulnerable to future growth shocks, risking stagnation in living standards, a more closed economy and the unwelcome prospect of financial repression.