Brazil avoided falling into recession on Thursday with the release of new economic data showing South America’s largest economy grew by 0.4 per cent quarter-on-quarter in the three months to June, a better than expected performance.
The figures showed that Brazil’s economy moved back into expansion after shrinking by 0.2 per cent in the first quarter, and its performance was better than analysts had expected; economists polled by Reuters had forecast 0.2 per cent growth.
But the development is unlikely to be of solace to President Jair Bolsonaro, who was elected almost a year ago on promises to shake up and revitalise the economy but has been slow to implement his reform agenda.
“We need to understand how weak the Brazilian economy is,” said Zeina Latif, chief economist at XP Investimentos, pointing to weak levels of investment, dwindling human capital and decaying infrastructure.
Concerns are growing about a global downturn as major economies including the US and Germany show signs of slowing growth, while China — Brazil’s largest trading partner — is expanding at its slowest rate in almost three decades as Washington pursues a trade war with Beijing.
Earlier this year many in Brazil expected a government-led liberalisation programme to boost the economy after years of economic torpor, but since then the prevailing sentiment has soured.
With the exception of a much-vaunted pension reform — which is likely to be approved in Congress in the coming months — little has been done to shake up an economy plagued by weak industrial production and red tape.
As concerns have mounted, foreign investors have so far this year pulled almost $5bn from the main B3 stock exchange — the biggest outflow since 2008.
“Confidence is not recovering because of the noise coming from political side. It really hurts. Pension reform is positive, but is it enough? No,” said Ms Latif.
Meanwhile, many Brazilians are struggling. The unemployment rate has remained intractable at 12 per cent, while the number of citizens living below the poverty line has increased to almost 55m, up from 52m just three years ago.
As permanent contracts have dried up, many have taken jobs in the gig economy with food delivery or transport apps.
“I used to work 44 hours a week. Now I work 12 or 14 hours a day to receive the same amount,” said Gustavo Leonardo de Abreu, a 32-year-old driver who worked in the chemical industry until he was fired in 2017. “There I had some benefits like health insurance and food tickets. Now I don’t have any.”
For many businesses, uncertainty about Brazil’s future trajectory has stymied investment decisions, with many quietly holding off big projects. According to official data, investment in Brazil declined from 20 per cent of GDP in 2013 to just 15 per cent last year.
“The main reason behind the non-recovery is the lack of trust from investors,” said Fernanda Consorte, chief economist at Ourinvest Bank. “When we look at the economy, we thought that the elections and the pension reform would solve the problem. But reform will not bring results in the short term.”
The country is also being buffeted by broader global trends, including the US-China trade war and fears of a worldwide recession, which would increase risk aversion in emerging markets such as Brazil.
“The deteriorating world economy makes it more difficult to break the relative stagnation cycle,” said Carlos Langoni, director of the World Economy Center at the Getúlio Vargas Foundation. “Common sense suggests that [this] deterioration . . . will make it difficult for the Brazilian economy to again tread the path of sustained growth.”
For Marcos Felipe Casarin, director for Latin America at Oxford Economics, much of Brazil’s current pain stems from the economic collapse of neighbouring Argentina.
“In the first half of the year Brazil was hit by exogenous shocks — quite severe shocks. One of our biggest trading partner is collapsing,” he said.
Argentina is Brazil’s third-largest trading partner, mainly importing manufactured and industrial goods.
“The most recent collapse will be a game changer for Argentina,” Mr Casarin said. “The country is now in a position much worse than when [President Mauricio] Macri started. This can have negative impact on Brazil and [the problem] can drag for a longer period of time.”
The downturn in Brazil is likely to increase pressure on Mr Bolsonaro to step up his economic reform agenda, including tax reform and privatisations.
Since his inauguration in January, the far rightwing leader has been embroiled in almost constant controversy on issues ranging from gun control to deforestation in the Amazon.
But given that his predecessor Dilma Rousseff was impeached for alleged economic mismanagement, Mr Bolsonaro is likely to be keenly aware that a struggling economy presents a powerful cudgel to his political opponents.
Additional reporting by Carolina Pulice