During the 2008 financial crisis, many of the world’s major economies went into deep recessions. But not Brazil’s. After registering 5 percent growth in 2008, its economy contracted by just 0.1 percent in 2009 but recovered with a strong 7 percent growth rate the following year. Its own economic reckoning wouldn’t come until 2015. That year, Brazil’s economy contracted by 3.5 percent, and in 2016, it contracted by another 3.3 percent, according to the World Bank. In the two years that followed, its economy grew a mere 1 percent annually – hardly enough to be considered a recovery. Brazil went from having the seventh-largest economy in the world with a nominal gross domestic product of $2.46 trillion in 2014 to the ninth-largest economy in the world with a nominal GDP of $1.96 trillion in 2019.

Still, a recession in Brazil could have a major impact on other countries, especially since the U.S., Germany and China are also showing signs of a downturn. And Brazil’s economy has indeed been struggling. At the beginning of the year, the Brazilian central bank forecast 2.5 percent economic growth for 2019. That figure was revised to 2 percent in early April and then to just 0.8 percent in early July. Next week, the country’s statistics agency, IBGE, will release official figures on second-quarter growth, but the most optimistic estimates suggest it will stay around 0.3 percent.

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It’s easy to see why the estimates are so pessimistic; the country’s economic activity index – seen as an indicator of growth – declined by 0.13 percent in the second quarter, and the economy contracted by 0.2 percent in the first. Another consecutive quarter of contraction would put the country in a technical recession. Either way, the Brazilian economy is clearly struggling, and the government appears to be preparing for the worst, introducing stimulus measures to try to boost growth.

Slow and Painful

Brazil’s modest recovery from its two-year recession has been slow and painful. Since 2017, the government has adhered to budget spending caps and has slashed spending on social programs. Unemployment reached 12.7 percent in the first quarter of this year, and though it has since fallen to 12 percent, it remains well above pre-recession levels, and an additional 28.5 million Brazilians (25 percent of the working-age population) are considered underemployed. Productivity has dropped as more people settle for informal work or leave the workforce altogether. Research from the Brazilian Institute of Economics found that labor productivity fell 1.1 percent in the first quarter of this year, led by declines in the manufacturing and services sectors. The deceleration is even more stark when compared to the 2.8 percent increase in productivity in the last quarter of 2018. Real income has also declined throughout the year. In May, the average household monthly real income was 2,280 reals ($560), down 1.5 percent from the previous quarter.

To address these issues, the government of President Jair Bolsonaro has made structural reforms a top priority. The cornerstone of the reforms has been changes to the pension system – including an increase in the retirement age – through which the government hopes to save $800 billion to $900 billion over the next 10 years. According to the Bolsonaro administration, spending on social security and other social assistance programs in Brazil ranks among the highest in the world, and it’s becoming a bigger burden as the Brazilian population ages and its growth rate declines.

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The government’s structural reforms also include privatization efforts to reduce support of unprofitable companies and public sector presence in the economy. In agriculture, the government has moved away from subsidizing production in favor of new and larger lines of credit for farmers. There are also proposals for modifying labor laws to generate more jobs. It’s hoped that deregulation will make it easier for companies to do business in the country and, therefore, attract more private investment at a time when the government’s own ability to stimulate the economy through spending is limited. To that end, the government has introduced the Direct Investment Ombudsman, whose purpose it is to support foreign investors with general inquiries and questions over legislation and administrative procedures related to investing in Brazil.

Several factors, however, have complicated these reform efforts. Passing social security changes is challenging in any country, but it is especially so in a country as diverse and divided as Brazil. Brazil’s lower house has approved the pension reform bill, but the Senate has yet to vote on it. And as economic growth has stalled, the government has had to repeatedly cut back spending to meet the self-imposed spending cap. It froze $2.2 billion in spending in late May and another $2.3 billion in late July. Despite these cutbacks, the government is at risk of exceeding its budget deficit target of 139 billion reals for the year because of lower-than-expected revenue. It has worked with state-level governments, which are also struggling financially, to harmonize national and state plans and avoid state bankruptcies.

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The U.S.-China trade war is also partly to blame. Exporters and major industries across Brazil delayed or reduced (by hundreds of millions of dollars) investment plans because of the trade war, and there’s growing concern that, as the war escalates, Brazil’s window of opportunity for recovery will narrow. Meanwhile, the country’s third-largest trade partner – Argentina – is in the middle of a recession, which has naturally hurt bilateral trade. Argentine purchases of Brazilian products fell 41.7 percent to $5.3 billion in the first half of 2019. This has significantly affected Brazil’s automotive industry, and it’s a major reason that Brazil’s manufacturing sector has struggled over the past two years.

Introducing Stimulus

The government has therefore introduced some economic stimulus measures. Though it initially wanted to hold off on a major stimulus package until after the reforms were implemented, the government believed it could no longer wait to try to encourage spending. In July, the government loosened rules over when and how workers can access their FGTS retirement accounts. (Previously, these funds could be accessed only in case of retirement, severe illness or to purchase a home.) The measure is expected to inject up to 42 billion reals into the economy by 2020. Another 21 billion reals were made available through another social welfare fund, but only 2 billion reals are expected to be redeemed. This month, the government also announced plans to reduce the financing rate by as much as half for home buyers. For its part, the central bank said that, for the first time in 10 years, it would sell dollars on the spot currency market because of increased demand for liquidity – a move previous administrations were very reluctant to allow for fear of draining its foreign reserves.

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The government has tried to encourage trade to supplement weak domestic demand. In the past, domestic demand has been a major driver of the Brazilian economy, while exports have accounted for only 15 percent of GDP. But after two years of recession and a weak recovery, domestic demand has slipped, and there’s an increasing need to look to foreign consumers. But Brazil’s top three export destinations – China (27.6 percent), the U.S. (13.4 percent) and Argentina (4.7 percent) – are all showing signs of downturn. This explains in part why Brazil has worked to loosen trade restrictions within Mercosur – the South American trade bloc consisting of Brazil, Argentina, Uruguay and Paraguay – and why, after 20 years of negotiations, Brazil helped push through a free trade agreement between the European Union and Mercosur. The agreement hasn’t been ratified yet, but Brazil is already pursuing free trade agreements with other partners, including the United States and South Korea, and it reached a trade deal with Mexico on light vehicles, subject to a 40 percent regional content requirement, after six years of talks.

The government introduced several measures to try to recover from its last recession – measures that are now being used to stave off another downturn. It finds itself in the same position as many other major economies trying to avoid recessions of their own. More changes – including another possible stimulus package – may be on the way, and with an interest rate at 6 percent, there’s room for maneuver on monetary policy, too. But whether these steps are successful in preventing another major downturn remains to be seen.

Allison Fedirka
Allison Fedirka is a senior analyst for Geopolitical Futures. In addition to writing analyses, she helps train new analysts, oversees the intellectual quality of analyst work and helps guide the forecasting process. Prior to joining Geopolitical Futures, Ms. Fedirka worked for Stratfor as a Latin America specialist and subsequently as the Latin America regional director. She lived in South America – primarily Argentina and Brazil – for more than seven years and, in addition to English, fluently speaks Spanish and Portuguese. Ms. Fedirka has a bachelor’s degree in Spanish and international studies from Washington University in St. Louis and a master’s degree in international relations and affairs from the University of Belgrano, Argentina. Her thesis was on Brazil and Angola and south-south cooperation.