By Gabriel Burin
BUENOS AIRES (Reuters) – Brazil’s economic recovery is at crunch time for meeting lofty quarterly growth expectations just as a sudden inflation spike adds to worries about the coronavirus pandemic’s devastation and unconvincing budget plans, a Reuters poll showed.
Growth in Latin America’s biggest economy looks on track for completing a V-shaped pickup in the second quarter, after a historic recession resulting from the first hit of COVID-19. Nevertheless, threats continue to mount.
Part of the recovery is due to President Jair Bolsonaro’s opposition to lockdowns, a decision many blame for why Brazil has become the world’s epicenter of the pandemic, with a healthcare system on the verge of collapse.
At the same time, the country is grappling with a jump in consumer prices led by a pass-through to domestic food costs of bullish global commodity markets. In response, the central bank has begun to frontload its planned policy normalization.
“Rising virus cases and the unwinding of most of last year’s fiscal support package present clear downside risks to the growth outlook,” Capital Economics analysts said in comments for the survey.
“The inflation spike in Q2 is likely to be ugly. We see inflation peaking at 7.5%, but it could be higher. However, the factors pushing it up are largely transitory, and inflation is likely to fall very sharply from Q4 onwards.”
Amid the health catastrophe and unemployment rates that remain near the highest in eight years – above 14% – Bolsonaro has yet to sign on to a hotly debated budget bill that some see as too weak but others view as excessive.
While officials stress their “fiscal zeal”, economists think this year’s targets may not be met due to continued spending in the fight against the pandemic, most notably the revival of emergency cash transfers to the poor.
Brazil’s gross domestic product is expected to grow 9.9% year-on-year in April-June, according to the median estimate of 16 economists polled April 12-16. On a wider sample of 37 respondents, GDP is set to expand 3.2% in 2021 and 2.3% in 2022.
Growth projections were similar to those in January’s poll, but inflation estimates showed a big upside correction, to 5.1% in 2021 from 3.6% in the previous survey, and 3.6% in 2022 versus 3.5% forecast three months ago.
In reply to separate questions, a majority of economists saw risks for Brazil’s economy skewed to the downside and for the country’s inflation outlook tilted to the upside, reinforcing a possible “stagflation-lite” scenario.
Some analysts remain cautiously optimistic.
“Relief for Brazilian assets could come through progress in the vaccination schedule, in addition to approval of reforms in Congress,” said Laiz Carvalho, chief economist at Brasilprev.
On the other hand, prospects for Mexico improved significantly from January, with economists now anticipating growth of 4.7% in 2021 and 2.5% in 2022, compared to 3.5% and 2.5% respectively in the last survey.
“The boost exerted by an accelerated recovery in the U.S. would be offset by a gradual internal recovery (…) stronger global spillover effects could provide additional momentum to GDP growth,” Jessica Roldan, chief economist at Finamex, said.
(For other stories from the Reuters global economic poll:)
(Reporting and polling by Gabriel Burin; Editing by Bernadette Baum)
