Falling GDP calls warning for recession or even stagflation

posted on 09/02/2021 05:52 / updated on 09/02/2021 05:54

  (credit: illustration editor)


(credit: illustration editor)

The 0.1% drop in Gross Domestic Product (GDP) in the second quarter of 2021, compared to the first three months of the year, triggered a new wave of downward revisions to the country’s growth estimates, already threatened by the water crisis and for political instability. A new recession – characterized by a fall in activity for two consecutive quarters – or even the worst of the worlds in economic theory, stagflation, which is a scenario without economic growth, but with high inflation, in case of energy rationing, is not ruled out.

The downturn in economic activity announced yesterday by the Brazilian Institute of Geography and Statistics (IBGE) interrupted a process of recovery in activity that had already lasted three quarters. The retreat was pulled by falls of 2.8% in agriculture and 0.2% in industry. The 3.6% slide in investments and the stagnation of household consumption (the main engine of GDP that has been decelerating since the last quarter of 2020) also contributed to the poor result.

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(photo: illustration editor)

According to economist Silvia Matos, coordinator of the Macro Bulletin of the Brazilian Institute of Economics (Ibre) of the Getulio Vargas Foundation (FGV), after the new GDP data, the models point to a further 0.1% drop in the third quarter. “There is still a lot of uncertainty for us to confirm a stagflation, but it could occur if there is energy rationing,” he pointed out. The economist revised the GDP growth estimate from 5.2% to 4.9% this year, from 1.6% to 1.5% in 2022.

Even those who have not yet reduced the projections admit that the bias is downward. “The most optimistic in the market, who were forecasting a 6% increase for this year, should adjust their estimates to something closer to 5%, which is what we are forecasting. We don’t see how the country can grow any more than this”, commented Alessandra Ribeiro, partner at Tendências Consultoria, which reduced the forecast for GDP growth in 2022 from 2.2% to 1.8%. Alessandra says that the scenario of stagflation “not the most likely”, but does not rule out recession if the risk of blackout increases.

Roberto Padovani, chief economist at Banco BV, pointed out that, despite having grown 0.7% in the second quarter, the service sector did not compensate for the declines in industry and agriculture. “Looking ahead, there are some challenges that are the imbalances in the production chain and political noise,” he said. “The concern is greater with 2022, which will be a year of turmoil,” he added.

Caio Megale, chief economist at XP Investimentos, noted that, in the last four weeks, there was an important deterioration in market liquidity conditions and in expectations of rain and rationing. In addition, “inflation is under pressure and will make the Central Bank raise the Selic (basic interest rate) to above 7%, or 7.5%, which will harm activity.” This combination of factors should lead him to reduce the projection of a rise of 2.3% of GDP in 2022. For 2021, he maintained the forecast of 5.5%.

The Minister of Economy, Paulo Guedes, on the other hand, minimized the drop in activity by stating that the GDP “was sideways”. “Economics came back in V. They said I was in a parallel universe when I said that, but we’re growing again. Today, a figure came out, practically aside, of a fall of 0.05%, which is rounded up to 0.1%. If it were 0.04%, it would be zero”, he said, at an event with congressmen.

For analysts who closely follow the GDP figures, there is a lot of inequality in the data and in the recovery process for each segment and, therefore, it is not appropriate to say that the country has “taken off”, as the minister usually says. With a 0.1% drop in GDP, Brazil lost 10 positions in the global ranking prepared by Austin Rating, and was below the world average and that of its peers. “The second quarter results show that the Brazilian economy is not booming,” said Alex Agostini, chief economist at Austin.

Inflation and unemployment hold consumption

The stagnation of Brazilian consumption is at the root of the 0.1% drop in GDP (Gross Domestic Product) in the second quarter of the year. Household consumption accounted for 62.7% of GDP in 2020, according to the Brazilian Institute of Geography and Statistics. This year, however, with the increase in inflation and economic instability in the country, many families had to sharply reduce their expenses.

Marbler Murilo Paiva Castro, 29, is trying to acquire new habits. “The way to survive, at the time we are living, is to work more, adapt to the new values, both in terms of gasoline and food. We try to cut down on meat, eat more of the basics, feed the children a little less healthy, because healthy food is very expensive. The gas only lasts a month. We cut half of the things we ate. At the children’s lunch, there was a stuffed biscuit; now it’s water and salt; milk is also very expensive”, he said.

The student of Social Work at the University of Brasília (UnB) and bilingual professor Lalesca Medeiros, 23, also reports difficulties in dealing with the new prices. “We no longer do supermarkets for big purchases of the month, we buy chopped and what is on sale. The quality of our food has changed a lot, it has become simpler, less varied. My mother loves to cook and it is very difficult for her to open cupboards and refrigerators and not have anything”, she said.

Lalesca explained that in addition to high prices, the family faces a drop in income. “My mother is a stationery salesperson, and commissions have decreased. It’s a shock, especially when everything is increasing. The quality of life we ​​had changed drastically” he reported.

For 45-year-old electrician Luiz Sérgio Filho, the last few months have been the most difficult since the beginning of the pandemic. “We, here at home, were able to receive help at the beginning. My wife and I, who is a manicurist, were not working properly. But, thanks to God, we were able to buy food and pay our bills with the help of the aid”, he recalls.

Now, without the old amount of aid, Luiz Sérgio and his family are trying to save as much as possible. “We never like luxury, but now we buy the basics, the basic basket itself, and that’s it. We even stopped wasting water and spent a lot of time with the TV on. Everyone is saving,” he said.

Agribusiness and industry disappoint

Two fundamental sectors for the Gross Domestic Product (GDP), agriculture and livestock and industry, gave bad news for the country in the second and third quarter of this year. The segments retreated, respectively, 2.8% and 1.6%.

The drought, which threatens to lead the country to energy rationing, was the main reason for the drop in production in the countryside. According to Renato Conchon, coordinator of the Economic Nucleus of the Confederation of Agriculture and Livestock of Brazil (CNA), sector activity normally declines at this time of year, but the intense drought contributed to the movement coming above expectations.

“Every agricultural activity has cycles. Normally we see a good first quarter, a second quarter a little lower, the third quarter even lower and, in the fourth quarter, we are seeing better numbers again,” said Conchon. According to him, the decrease in the sector’s GDP was boosted by droughts and in regions that produce corn and cotton. “We also did not foresee frost in some regions of Brazil, which ended up harming these crops even more”, explained the coordinator of the CNA.

Despite the drop in the second quarter, CNA does not expect a reduction in the planted area, which could aggravate the situation. The industry, on the other hand, faces a more complicated scenario. According to a survey released yesterday by the National Confederation of Industry (CNI), the industrial productivity index in the second quarter of 2021 fell by 1.6% compared to the previous period (the same number as the reduction in production measured by the IBGE), accumulating three consecutive low quarters .

Marcelo Azevedo, manager of Economic Analysis at CNI, explains that productivity is the result of a 3.8% drop in production in the manufacturing industry and a 2.3% decrease in hours worked.

“The indicator reflects a depletion of investments made — and the environment of uncertainty for those who invest. With several factors in contraction, this behavior of productivity is not surprising”, said the economist.

Azevedo noted that there is no sustainable growth without increased productivity. And this only grows with more investments in innovation, management and training. “In the past, in times of acceleration of the Brazilian economy, we ran into some obstacles, one of them the lack of qualified workers, which limited growth. The investment in education and qualification is fundamental so that this story does not repeat itself when the Brazilian economy finally overcomes the pandemic and starts a new expansion cycle”, he said.

*Interns under the supervision of Odail Figueiredo