Brazilian GDP plummets 9.7%, the biggest drop recorded by IBGE in the last 25 years #PIB

 The IBGE announced today that the country's Gross Domestic Product (GDP) amounted to R$ 1.653 trillion from April to June 2020, shrinking 9.7% in relation to the first quarter of the same year. This is the lowest result since the beginning of the historical series, in 1996. The accumulated drop in the first half was 5.9%.

This drop in Brazilian GDP has made the country economically regress in more than a decade, returning to the level of 2009. An unprecedented tragedy. According to IBGE, household consumption, which represents 65% of GDP, had a record decrease of 12.5% in the period.

It is important to remember that at the beginning of the year, Brazilian Economy Minister Paulo Guedes said that the country would grow by around 1% in 2020 and that only 5 billion would be needed to deal with the pandemic. Both predictions are gigantic errors, so far the government has spent more than half a trillion Reais on aid to the poorest Brazilians and even so the country has not managed to escape from a technical recession. As for the 1% growth, even before the pandemic, the country, according to the IBGE, was already finding itself downhill economically. After correcting the figures for the first quarter, the IBGE indicated that even before the pandemic, Brazil's economy had already fallen by 2.5%.

Reduction in the pace of growth of the global economy should worsen the situation of the Brazilian economy

The resurgence of the commercial confrontation between China and the United States added to the slowdown of the European economy will affect the growth of the Brazilian GDP.

In Brazil, the Social Security Reform proposed by Jair Bolsonaro's government has not yet been able to raise enough votes in Congress to approve this change. With this, the country continues with serious problems in its public accounts.

The fact that the Brazilian reform agenda does not move in the National Congress greatly affects investments in the country.

The average annual GDP growth since 2016 is at 1.5%. By 2019, the forecast, which at the beginning of the year reached 3% GDP growth, is now around 1.5%. There is a general perception of distrust in Brazil. Few economic agents believe that the country will leave this almost stagnant picture.

To make matters worse, the unemployment picture continues to rise, an indicator that points to a stagnant economy. The Brazilian industry, an important driver of the economy, is experiencing an evident process of the deindustrialization of the country. This reduces the size of Brazil in the world economy.

So far, the current government has not presented any strong policy aimed at the development of the Brazilian economy. There is, for example, no inducement of growth through state investment in infrastructure works.

To get an idea of what could be done, Brazil's numbers on basic sanitation have stagnated for about three years, which means that little or no investment has been made in this sector. There are currently 35 million people in Brazil without access to the drinking water network, 95 million people live in places without sewage collection, and only 46% of sewage is treated in Brazil.

Brazilian GDP may have negative results in the first quarter of 2019

Several Brazilian banks reduced their forecasts for the Brazilian GDP growth in the first quarter of 2019. In recent days, Itaú has reduced its expectation of 2% growth of Brazilian GDP in 2019 to 1.3%. Safra bank lowered its forecast from 2% to 1.5%. Bradesco, which projected a growth of 2.4% in GDP growth in Brazil in 2019, changed its expectation to 1.9%.

The worst projection was due to Banco Fator, which had forecast a growth of 1.7% of the Brazilian GDP in 2019. Now, Banco Fator understands that Brazilian GDP growth should be at 1.3% in 2019. The Factor also pointed out that the first quarter of 2019 should be marked by a decrease of 0.7% in GDP.

Because of these reductions, there is, therefore, a large decrease in bets favorable in relation to Brazil between domestic and foreign investors.

The current uncertainties in the political scenario and the reform agenda certainly greatly delay economic growth because it greatly reduces growth expectations for the Brazilian economy. However, this is the third consecutive year in which market expectations are reduced considerably. This points to a recurring error in the analyses made by economists in relation to the Brazilian political structure.

The financial market players erred in analyzing the Temer government and now erred again in expecting Jair Bolsonaro's presidency a minimally organized government. So far, what has been seen was a lot of confusion, unpreparedness and a tendency to give up the liberal agenda against any pressure, as occurred in the case of Petrobras.

According to Reuters, "although Bolsonaro vowed orthodox economic policies in his far-right presidential campaign last year, his first 100 days in office have raised concerns that more populist factions in his government may have an upper hand over free-market voices".

This shows a huge gap between market analysis and expectations and the real capacity for reform and to carry out economic policies that Brazilian politicians have.

Brazil's GDP growth to be the lowest in 120 years

A projection by the Instituto Brasileiro de Economia (Brazilian Institute of Economics) of the Fundação Getúlio Vargas (Ibre/FGV) indicates that the average growth of the Brazilian economy should be only 0.9% per year between 2011 and 2020. If everything continues as it is, will have its weakest performance in 120 years.

According to Ibre/FGV analysis, the weak performance of the economy reflects the successive deficits in public accounts since 2014 and two consecutive years of recession in 2015 and 2016.

This rate is lower than the 1.6% of the so-called 'lost decade' in the 1980s when the Brazilian government declared a moratorium and suspended the payment of international creditors.

In 2015 Brazil's GDP fell by 3.5%. By 2016, the fall in GDP was 3.3%.

According to the Ibre/FGV researcher, Marcel Balassiano, the country would have to grow around 5.7% in 2019 and 2020 for this decade also not be considered a lost decade.

Overall, Brazil's economic recovery has been slow, the industry is struggling to catch up, and the Brazilian state is headed for a few more years of fiscal deficits.