OECD Latin America – Brazil 1/2022

Brazil

Update on latest developments

Economic indicators suggest that the recovery in Brazil slowed significantly in 4Q21 as inflation squeezed household activities while manufacturing and service sector activities were disappointingly slow. Industrial production shrank 4.4% y-o-y in November 2021, marking the fourth-straight month of contraction.

Brazil’s unemployment rate eased slightly to 12.1% in the three months to October 2021, from 13.7% in the three months to July 2021, marking the lowest rate recorded since February 2020. The unemployed population dropped by 1.5 million to 12.9 million, while the number of employed surged by 3.3 million to 94 million.

Inflation eased to 10.16% y-o-y in December 2021 from the 18-year high of 10.74% y-o-y in November 2021, registering the first decrease in the inflation rate since May 2020, taking into account the low base effect, as consumer prices for housing and utilities rose at a slower pace. On a monthly basis, consumer prices increased by 0.73% compared to 0.95% in the previous month.
In response to inflationary concerns, the central bank on 8 December raised the Selic rate for the seventh time in 2021 as it unanimously decided to raise the rate by 150 basis points to 9.25%. The forecasts from the monetary authorities suggest that inflation in 2022 could come close to the central bank’s 5% target.

Near-term expectations

Brazil’s economic activity has slowed considerably, a trend that is more likely to continue in 1Q22 due to political uncertainty related to the 2022 election along with the ongoing global supply disruptions as well as a new wave of COVID-19. These factors could also dampen the 2022 outlook. Additionally, elevated inflation rates could continue to be a major drag on economic recovery. Monetary policy would be highly contractionary and the tighter credit conditions might slow domestic demand at a time when fiscal policy might be relaxed marginally due to high public debt levels. Indeed, the high debt load could compromise the Brazilian economy’s ability to grow faster than its peers in Latin American region.

Recent composite PMIs suggested that a weakening private sector recovery might carry over into 2022. The manufacturing PMI stood at 49.8 in December 2021, unchanged from the prior month. Similarly, the services PMI remained at 53.6 in December 2021, pointing to the seventh month of expansion in the services sector amid the continued progress in vaccine distribution and the easing of pandemic- related restrictions.

Overall, manufacturing and services business sentiment for 2022 remains positive, linked to the growing vaccine coverage, reduced COVID-19 cases, and improved market confidence.

Considering the recent developments, the GDP growth forecast for 2021 remains the same as in the last MOMR at 4.7%. The 2022 GDP growth forecast is lowered to 1.5% from 2.0% taking into account the slowdown in economic activity. Uncertainty remains high and tends more to the downside due to heightened concerns over higher inflation, high fiscal stress following COVID-19 support efforts, and most importantly developments related to the pandemic both domestically and globally. Political uncertainties associated with the upcoming 2022 election have also been taken into consideration.