Economic outlook

Reflecting the impact of the COVID-19 outbreak, the IMF estimates Brazil’s GDP contracted nearly 6% in 2020 following three years of tepid growth.

Despite new COVID-19 infections and fatalities remaining high, the economy has started to recover. The IMF expects a return to growth of 2.8% in 2021. The strong fiscal and monetary policy response helped prevent a sharper economic contraction and is now supporting the recovery. A temporary emergency benefit has supported over 67 million low-income households, cushioning the impact on household incomes and poverty. Bank lending is on the rise, particularly in the housing and construction sectors, a trend that should continue amid record-low interest rates. 

Structural reforms to enhance domestic and external competition and improve the investment climate could raise productivity. The potential for new legislation around the regulatory framework for natural gas and private sector investment in water/sanitation services could lift growth. And, the weaker Brazilian real should support the export competitiveness of local producers.

Downside risks are prominent. A resurgence in COVID-19 infections could hinder output from key commodity producers, such as iron ore, as it did in 2020. Commodity prices for key Brazilian resources could face downward pressure from a weaker world economy. Private consumption faces ongoing challenges from high unemployment and high household debt. Insufficient progress on reforms, including for example barriers to trade and complex procedures for taxation, would undermine investor confidence in Brazilian financial assets and the economy. The potential for an increase in political polarisation or the emergence of social unrest remains an ever-present risk to economic and financial stability. Brazil’s high public debt and large funding needs raise sovereign credit risks.

Per capita income more than tripled between 2004 and 2014 on the back of strong GDP growth and rising commodity prices to lift Brazil to upper-middle-income status. The country helped take millions of people out of poverty. But the IMF estimates per capita incomes at roughly US$6,500 in 2020, about half the level of 2014. The COVID-19 crisis has exacerbated the hit to incomes still reeling from the recession in 2015-16 and lingering high unemployment. A return to economic growth and prospects for structural reforms and education advances over the next five years, if effectively implemented, should support a gradual strengthening in GDP per capita.