Trouble in the Tropics: Brazil Economy Overview

An IMF report published in May 2019 found the recovery of the Brazillian economy remains “sluggish” after the devastating recession the country endured in 2015 and 2016. This refers to the contraction of Brazil’s GDP in the first quarter of 2019, which was preceded by two years of modest increases in 2017 and 2018 (1.1%). 

Political and social upheaval still could cause shocks that would derail Brazil’s pension reform, according to the IMF mission statement. President Jair Bolsonaro, inaugurated on the 1st of January 2019, promises to continue pushing to reform the pension system, which currently accounts for around 44% of Brazil government spending. These pension reforms are crucial for the future of Brazil's economic outlook and currently seem to be the quickest way to save money.

Brazil’s Economy by the Numbers

Brazil was once considered one of the global market’s great white hopes. Along with Russia, India, and China, it belongs to the so-called “BRICs,” a group of nations expected to experience a meteoric rise in the coming decades.However, it looks like Brazil’s performance is not living up to its great expectations. Even though it is the eighth-largest economy in the world with vast amounts of natural resources and a population of 210 million, things are not developing as they should.

The 2015-16 recession dealt devastating blows to the Brazil GDP growth rate. The country’s economy was crashing and the political system was fraught with scandals, which pushed it to its breaking point.The turbulent presidency of controversial populist Jair Bolsonaro, whom some call the “Brazillian Trump,” makes it very difficult to predict the future of Brazil’s economy at the moment. Market metrics are hectic and projections by the IMF and similar global economic institutions fluctuate on a monthly basis. 

Currently, 2019 looks like it’s not going to be the year to save the economy in Brazil. The country remains in its historic slump, with the first quarter of the year yielding a drop in GDP compared to the same period in 2018.

The Worst of Times: Brazilian Economic Crisis

As the graph shows, Brazil’s recession caused a devastating crisis in 2015 and 2016. Over the course of these two years, the country’s GDP fell by 7%. Every sector of Brazil’s economy was affected, most notably agriculture, which suffered a 6.6% decline. Family consumption dropped by 4.2% as the unemployment rate soared to 12% in 2016. 

The reasons behind this sudden decline were both political and economical. 

During the presidency of Luiz Inácio Lula da Silva (commonly known as Lula) between 2003 and 2011, Brazil enjoyed a period of prosperity and economic growth that has rarely been seen in recent history. The main catalyst for this economic blossoming was global demand for commodities like soy, oil, and iron ore, all of which Brazil exported in abundance. Spirits were high and Lula’s presidency was seen as a golden age of progress.

But when demand for commodities dropped in the middle of the current decade, cracks in the governmental system and the economy of Brazil began to show. Corruption scandals shook the political establishment, culminating in 2015’s Operation Car Wash.

The federal investigation uncovered a pervasive bribery scheme involving the top executives of Petrobras, Brazil’s state-owned oil company. It’s estimated this scandal alone was responsible for a 1-1.5% contraction in Brazil’s GDP.

In the resulting aftermath, the incumbent Dilma Rousseff, Lula’s successor, was impeached by the Senate in 2016. Multiple other dignitaries, including Lula, fell from grace and are now serving prison sentences.

Michel Temer, vice president to Rouseff, inherited the presidency after her impeachment. Although highly unpopular, he proposed new projects to remedy the country’s economic downfall. The 1.1% increase in GDP in 2017 was announced as the beginning of the end of the recession by Henrique Meirelles, the Minister of Finance. Everyone was waiting to see the performance of the Brazil GDP in 2018.

Jair Bolsonaro and Failing Expectations

The growth of the country’s GDP, however, was seen as too meager and slow to be called a true comeback. The Brazillian economy saw a 1.1% increase in 2018, which was classified insufficient to maintain a true resurrection after the worst recession the country had seen in this century. 

On the 1st of January 2019, the highly controversial Jair Bolsonaro was inaugurated into office as president. His administration inherited an economic mess and Bolsonaro’s strategy for recovery centers around a pension reform. 

Brazil’s pension program has been constitutionally protected since the end of military rule in 1988. Within it, citizens need to contribute to their pension fund for 35 years (male) or 30 years (female) to become eligible for a full payout. The troubles facing Brazil’s economy in 2019 can be explained in part by the fact that around 44% of the federal government’s budget goes towards the pension fund. If Bolsonaro’s reforms pass, the bar would be raised to 40 years, saving around $266 billion over the next decade. 

The first quarter of Bolsonaro’s inaugural year of presidency does not look promising; the economy has experienced its first contraction since the 2016 Brazil recession and dropped 0.2%. The unemployment rate remains shockingly high at 12.7%. Growth forecasts for the period to come are getting lower each month. 

The Brazil Economy: What to Expect

Right now, everything depends on Bolsonaro’s pension reform. But what the long-term future holds for this massive, culturally diverse, resource-rich country is guesswork at this point. Trade disputes between China and the USA, economic instability in neighbouring countries like Argentina and Venezuela, and a host of other external factors are all contributing to Brazil’s woes. One thing is clear: There are some tough times ahead for Brazil’s economy in the near future.