Economy

Brazil's economy disappoints and grows at lowest rate in 3 years

GDP grew just 1.1% in 2019, less than half the 2.5% forecast made by analysts one year ago

The Brazilian minister of Economy Paulo Guedes
Pro-market platform of minister of economy, Paulo Guedes, generated optimism among investors, but growth frustrated high hopes. Photo: Fabio Rodrigues/ABr
  • Unemployment, trade war, Argentine crisis and confrontational style of the current administration hampered growth;
  • Pension reform and historically low interest rates may spur the economy.

Brazil’s economy, the largest in Latin America, expanded just 1.1% in 2019, the slowest pace in three years, frustrating hopes of a swift economic revival under the pro-market platform of the country’s economy minister Paulo Guedes.

After expanding a mere 1.3% in each of the previous two years, Brazilian economy had another disappointing year – the rate came in at less than half the 2.5% forecast by analysts at the start of 2019. The year had indeed seen reforms that most economists said were needed, like President Jair Bolsonaro‘s administration overhauling the country’s pension system and cutting the government deficit. In the end, the market optimism and historically low interest rates weren’t enough to boost investment.

Growth last year was led by family consumption, which rose 1.8% compared to 2018, and investment that grew 2.2%, according to the Brazilian statistics institute.

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The new data also come amid growing fears about the impact of the coronavirus outbreak in Latin America. Economists this week cut Brazilian GDP growth estimates for 2020 to 2.1% from 2.3% just a month ago as concerns grow that the spread of the virus will hit the nation’s export sector, especially China-bound commodity products. Goldman Sachs cited the virus and its impact on global activity as rationale for lowering its Brazil call to 1.5%, from 2.2% previously.

Obstacles

The trade war between Washington and Beijing, economic and monetary crisis over the border in Argentina, an important trading partner, and concerns about the bellicose and adversarial behavior espoused by Bolsonaro and some of his cabinet members were all factors that contributed to hamper growth. Local obstacles also include persistently high unemployment rates, weakening currency and low commodity prices.

Government cuts in education, environmental protection and culture, among other areas, resulted in a 0.4% decline in government spending in 2019. State-controlled development bank BNDES drastically reduced lending in the hopes of giving room to private investments.

“The economic and social outlook in Brazil has been very uncertain. In a stressful environment, people are more cautious and companies are also more cautious when investing,” Thiago Xavier, analyst with Tendencias, a consultancy, told Financial Times.

Renewed optimism

According to investors and analysts interviewed by the Wall Street Journal, the passage of the pension reform should boost the economy from now on by freeing up more government cash, as will the low interest rates. The Brazilian Central Bank cut its benchmark rate to 4.25%, down from 14.25% in 2016. Please use the sharing tools found via the share button at the top or side of articles. 

Economists believe the agency will follow the US Federal Reserve and make another interest rate cut, most likely to 4%, at its next meeting on March 20.