A global view into the Brazilian economy of 2021

Feb 11, 2021

Each country follows different challenges for 2021, also related to dimensional or cultural aspects, but in the end, we all have to learn to live with the effects of the pandemic. Changes in the virus, return of higher contamination rate due to inattention during the holidays or logistical problems related to the vaccination. From an economic point of view, the year began with very different perspectives on the Asian, European and Americas sides. The undeniable attention paid to the measures recently taken in the United States impacts everyone, but China’s consumption also has an important influence on the international trade balance. In Brazil, the storm of the first half of 2020 was already balanced by exuberant economic activity in the last quarter of the year. For example, the boom in BR3 stock market exchange (27 IPOs in 2020) was a record, that surpassed the then record of 2010. And in the first half of this year, another 40 initial public offers are expected according to official data from AMBIMA (Brazilian Financial Markets Association). Despite the challenges on structural reforms, large banking institutions are optimistic about the Brazilian economy for 2021. The most optimistic such as Morgan Stanley, Goldman Sachs or Credit Suisse expects GDP growth of more than 4% and a recovery in the economic scenario. But Brazil’s two largest banks, Itau and Bradesco, also expect similar data along with inflation in the 3.5-4% range and an R$-USD exchange rate of 5 at the end of 2021. Interest rates, which have reached an all-time low, may rise somewhat but will not reach more than 3-4% at the end of 2021. This has fostered and will still favour an expansion in the real estate sector throughout the year. It is conceivable that, as in all other countries of the world, emergency aid in Brazil will end, but monetary policy will continue with a phase of expansion and, economic reopening will be decisive in expanding the supply of jobs which, combined with the use of part of the savings made by the middle and upper classes during the pandemic, will lead to positive growth. The services sector is expected to continue as the last in the recovery cycle. But it will also give favourable signals in the coming months, especially in those provided to households, the segment most affected by social distancing measures. Another substantial aid from the 2021 scenario may be significant progress on the tax reform agenda. The country needs a credible medium-term tax regime and the dynamics of public accounts. Maintaining the spending ceiling follows as a fundamental premise that, if not confirmed, will lead to a very different configuration of the desired scenario. Recovery will also be helped by the external environment. Asia’s growth, rising commodity prices, the expectation of stimulus packages from the United States and Europe, and lower risk levels as vaccination campaigns having increased the appetite for emerging-market assets. And Brazil has been able to detach itself from this by rapidly attracting foreign investment since last November. Inflation in 2021, in turn, will be the result of these forces. There is a need to recognize a certain heterogeneity in the recovery of the economy. On the one hand, there is a clear pressure in the goods sector, a sharp increase in the use of installed capacity, pressures on wholesale prices and stocks at an all-time low. On the other hand, even if we are betting on a stronger recovery in employment, the unemployment rate is unlikely to allow inflation to spread widely, especially as the recovery in the services sector is tending to begin gradually. These are topics that bring the inflation projection for 2021 from 3.5% to 4.3%, according to the main institutions. The challenges are certainly not small, the degree of uncertainty is high and it will be a year of great volatility but also of recovery and growth. For Italian and foreign companies that want to seize opportunities, Brazil certainly offers an interesting cost-opportunity, also thanks to the very favorable exchange rate for investments, as well as a gigantic market. It is no coincidence that all the large Italian companies present in Brazil have confirmed their expansion plans in the country.

Original article in italian.

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