Brazilian Economy contracts marginally as energy risks complicate growth outlook for the rest of the year.
Economy contracts 0.1 % in the second quarter of 2021
The IBGE revealed the GDP data for the second quarter of 2021. After a surprising rise of 1.2 % in the Q1 of 2021, the economy dropped marginally (-0.1%) during the Q2. The rise in the vaccinations and mobility data, alongside a recover in the services sector could not compensate the fall in the Agricultural and Industrial Sector.
On the demand side, private consumption registered zero growth after the end of the fiscal stimulus generated by the “corona-voucher”. Investments registered a strong fall, contracting 3.2 % during this period due to a deterioration in the expectations and a strong rise in input costs. Exports have risen strongly, following the growth in the world trade. The higher government expenditures related to the acquisition of vaccines and medical equipment guaranteed a 0.7 % growth in the government consumption.
The agricultural and industrial sectors were impacted by the higher cost of energy (both fuel and electricity), while the lack of rain caused by the “La niña” phenomenon have disrupted the supply line of many agricultural goods. After registering a strong recovery in the first quarter both sectors dropped in the Q2-2021. The higher mobility allowed the recovery of many sectors dependent on high human contact. Retail has risen 0.5 % and the sector of “other activities”, in which most human contact activities are, has grown 2.5%. Therefore, Services sector has grown 0,7 % in this period.
Multiple risks looking forward
Before the pandemic Brazil was registering low growth rates, struggling to find a new growth model after the commodities super cycle. During the pandemic, Brazil has implemented a strong fiscal package to offset the impact of the Coronavirus Crisis. It is difficult to say that the plan has not worked, Brazil registered one of the lowest contractions in the region (4,5%) and one of the quickest recoveries. However, at the end of the fiscal stimulus, the country sees itself with a larger debt, higher inflation and a higher unemployment rate.
And as if it wasn't enough, the country is suffering by the lack of rain during the year, caused by the "La niña". It has strongly impacted the Agricultural sector, rising the prices of Food and disrupting important chains of supply such as the cane industry. Moreover, the main supply of electricity of the country comes from hydroeletric plants, which has its reservoirs at the lowest historical level.
Even though the risks of electricity shortages are low, higher electricity bills might constrain private consumption ant it will rise the costs for the industrial and agricultural sectors, thus, damaging it's growth potential. The latest declarations of President Bolsonaro menacing the 2022 elections in case the paper vote is not reimplemented also does not contribute to the recovery of the economy as it frightens investment plans.
Compensating those negative risks, there is a strong recovery in world trade and high liquidity in the global markets. Moreover, Brazil has accelerated its vaccination campaign, around 61 % of its population is vaccinated with the first dose. This might warrant a better control of the Coronavirus in the upcoming months.
We foresee 2021 closing out with a 5 % GDP growth mostly due to cyclical effects of the pandemic recovery, the main risk is downside due to the energy crisis. In 2022, we believe President Bolsonaro will implement another type of "coronavoucher" policy as he seeks reelection with growth being around 2.5 % in this year.
