Economist Armando Castelar Pinheiro assesses that the Brazilian economy still has favorable conditions to grow in 2021, but the political conflicts and uncertainties generated by reforms under discussion in Congress are a “shot in the foot” against the recovery of the Gross Domestic Product (GDP ).
In an interview with state, Castelar says that the advance in vaccination favors the growth of part of the service sector, which is still less active than in 2019. But this recovery is taking place in a more turbulent way because of the political agenda.
“We created an untimely agenda, because of politics, with a lot of conflict between Powers, and because of a Congressional agenda that generated a lot of uncertainty. We shot himself in the foot. It was supposed to be a third quarter of smiles, of good news, of companies preparing for a cyclical recovery”, says Castelar, associate researcher at the Brazilian Institute of Economics at the Getúlio Vargas Foundation (Ibre/FGV). “Even politically it seems to make little sense. It would be much better from a political point of view for the government to have a more significant recovery of the economy.”
Read the main excerpts from the interview below:
Did the GDP for the second quarter, with -0.1%, surprise you?
The core stability message has been confirmed. That was the expectation. It was a drop of 0.05%, a number that ends up being adjusted to 0.1% when using only one decimal place. Basically, it is stability.
What explains this result?
The second quarter was a difficult period because it caught the peak of the second wave. For a time, there was even a fear of a fall in GDP. In this second wave environment, it wasn’t a bad result. And it was also a period marked by drought and frost, which ended up harming the result of agriculture. If there had not been a bad result in agriculture, the GDP could have been positive.
What most caught your attention in the result?
The result shows that household consumption is still retracted. When you look at the broader perspective, it was 3% below where it was at the end of 2019. It has not yet had a recovery, unlike GDP, which is basically 0.1% below (2019). And there is also a very high savings rate. It’s at 20.9% in the second quarter, the highest in 22 years. The GDP is still limited by the pandemic, because people do not leave, and this affects the employment, income and consumption capacity of families. This is an ongoing story that is expected to be overcome with vaccination.
And what are the new stories?
First, the construction went well. This very much reflects the increase in credit. Data from the Central Bank show a 22% growth in credit granted to individuals, and 6% to legal entities. In comparison with the second quarter of 2019, there was an increase of almost 100% – 96% for companies and 97% for individuals.
Was something else positive in the result, in your vision?
Growth was driven by services. This is the sector that is suffering the most because of lower household consumption. The data shows an increase of 2.1% in the segment of “other service activities”, an area that more closely takes up personal services, from housework, hairdressing, restaurant. These activities are 7.2% below the level at the end of 2019. And administration, defense, health and public education activities are 4.5% below. This is what is causing GDP to remain at the level of the end of 2019.
What does the result indicate for the economy’s recovery?
There are two forces positioning themselves for the post-pandemic. One is vaccination. The numbers reinforce the importance of vaccination and the reduction in the number of deaths and cases (from covid-19) as a force that will make the economy improve through household consumption. And, obviously, there are forces that play against: a more restrictive monetary policy (with the increase in the basic interest rate, the Selic), a fiscal policy that tends to be more restrictive next year with the reduction of emergency aid and the expenses that are extratecto and the increase in political risk, which can hit investment harder. Next year, maybe we will see these other (negative) forces stronger, explaining a lower growth in 2022. The market nowadays forecasts a growth of 2%, but some already project 1.5%.
Political and fiscal risks worry the markets.
We are still shooting a lot in the foot. This third quarter was supposed to be a quarter of optimism, of a stronger recovery. And we created an untimely agenda, largely because of politics, with conflict between Powers, and which now attracts the business world, and because of a Congressional agenda that generated a lot of uncertainty. We shot the foot. It was supposed to be a third quarter of smiles, of good news, as companies gearing up for a cyclical recovery. When looking at these sectors that are well below 2019, the effect of vaccination can bring an easy recovery gain. But we are doing it more difficult. It’s hard to explain why we did this. Even politically it seems to make little sense. It would be much better from a political point of view for the government to have a more significant economic recovery. But I still believe (in a recovery). I’m more optimistic than the market median.
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