Brazil GDP Contracted 4.1% in 2020 After Pandemic Shut Down Businesses

BY Dow Jones & Company, Inc. | ECONOMIC | 03/03/21 09:05 AM EST By By Jeffrey T. Lewis

SAO PAULO--Brazil's economy contracted in 2020 at the fastest pace in more than 20 years after social distancing measures intended to slow the spread of the coronavirus shut many businesses in the middle of the year and slashed activity.

Gross domestic product shrank 4.1% last year, the biggest contraction since the current series began in 1996, the Brazilian Institute of Geography and Statistics, or IBGE, said Wednesday. GDP increased 3.2% in the fourth quarter from the previous three months, beating market expectations for the period, and contracted 1.1% from the fourth quarter of 2019.

South America's biggest economy bottomed out in the second quarter of last year, when social distancing measures in Brazil were at their strictest, with GDP plummeting 9.2% from the first three months of 2020. Government stimulus measures, most importantly monthly payments to the country's poorest residents, helped spur activity and helped make Brazil's recovery stronger than most of its neighbors'.

"Back in March of last year, economists were expecting a much bigger contraction for 2020, but with the emergency aid and the easing of social distancing rules it wasn't as bad as we feared," said Alexandre Almeida, senior economist at the CM Capital brokerage in Sao Paulo. "It could have been much worse."

The aid payments started out at 1,200 reais a month, or about $211, to workers in the informal sector, which was slammed by social distancing measures that kept house cleaners and others at home and unable to work. The payments temporarily lifted millions out of poverty and provided much-needed income for retailers and other businesses as they re-opened.

The government cut the payments in half starting in September, but the inflow of cash into poor households continued to boost retail sales and industrial production through most of the rest of the year.

Alpargatas SA, the maker of the Havaianas brand of flip flops and other footwear, said it had record sales in the fourth quarter after it vastly expanded its retail network in Brazil by adding about 40,000 points of sales, many in essential businesses such as supermarkets and pharmacies.

The emergency aid helped spur sales at the start of the recovery, according to Alpargatas Chief Executive Officer Roberto Funari.

"We saw a lot of activity that boosted volume," he said, adding that sales improved even after the aid payments were cut in half.

The recovery in the second half of last year was mostly based on that government spending, which led to a big increase in the national debt and is causing concern in financial markets, economists said.

The government is working to resume the emergency aid payments this year, for fewer months and for smaller amounts, but it will continue to raise concerns, according to Rafael Cardoso, chief economist at Daycoval Asset, the asset managing unit of Banco Daycoval.

"It's becoming an uncomfortable problem," he said. "The national debt is close to 90% of GDP, that's relatively high compared with other emerging markets."

Last year, the government also provided aid to employers via deferred taxes and other breaks, and the central bank helped out by cutting its benchmark lending rate, the Selic, from 4.25% at the start of the pandemic to a record low of 2% by August. The bank is expected to start raising the rate in coming meetings as inflation has been heating up.

China's recovering economy supported demand last year for Brazilian export commodities such as iron ore and soybeans, while demand from the Asian country for beef and other animal protein raised prices for those foods at home, sending consumer prices higher in the final months of last year.

The start of 2021 has been complicated for Brazil. The end of the emergency aid program in December has meant the millions who received the money have less to spend. A recent rise in new infections and deaths from Covid-19 have also led many local governments to increase social distancing measures again, further depressing demand.

With the government apparently close to approving another round of emergency aid, the injection of cash into consumers' pockets will boost spending in the months Brazilians receive it, but the biggest factor in continuing the recovery will be the country's vaccination programs.

"They need to pick up the pace," said Daycoval's Mr. Cardoso. "We see a loss of dynamism in the economy at the start of this year, that will improve when the aid payments return, but for growth to reach the 3% level forecast for this year they need to get it together on vaccinations."

A lack of some supplies, such as syringes, and other materials have slowed the pace of inoculations just as the spread of a new variant of the coronavirus that researches say appears to be more virulent increases concern about the effectiveness of current vaccines.

Brazil's economy will expand 3.3% in 2021, according to a weekly survey of more than 100 economists by the Central Bank of Brazil. That figure is down from 3.5% two weeks earlier.

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com


  (END) Dow Jones Newswires
  03-03-21 0905ET
  Copyright (c) 2021 Dow Jones & Company, Inc.

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