What Is the “True” Recession Depth?

BRAZIL ECONOMICS - Report 22 Jun 2020 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Paula Magalhães

The market expected the IBC-Br to shrink by 11% in April, but the real decline was 9.73%. Could it be that “the recession will not be as bad as many people projected”? Before the pandemic, industry had not yet recovered from the recession of 2017, and indeed was still falling. The recovery, restricted to the service sector, was led by retailing, with a steady albeit modest increase in sales due to three main reasons: a) the increase of the occupied population; b) growth of real labor income; and c) recovery of lending to households. We show in this report that the labor market is getting drastically worse, reducing real earnings, so that household consumption is far from being the driving force for renewed recovery. With industry still in the doldrums, fixed capital investments are plunging, as consumption will not be even remotely close to the role it played in the recovery from the 2008-09 recession and finally, with the indications of hasty reopening of the economy raising the risks that the social distancing will instead last longer than would otherwise be the case (although more relaxed), the scenario is for further decline of GDP. These are the reasons why we maintain our projection that GDP will shrink by 7.5% in 2020, followed by growth of 2.5% in 2021.

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