The obstacles to economic recovery
The Brazilian economy began 2021 without the emergency payments, vaccination at a slow pace, high unemployment rate and inflation still under pressure. It is a scenario that points to weak activity in the first quarter, with a probable drop in the GDP compared to the previous quarter. The handouts, however, are likely to be resumed, although at a lower value and not for very long. Vaccination, on the other hand, will speed up and, depending on the pace of inoculation, tends to make the circulation of people increase and, therefore, help to allow lower restrictions on mobility, favoring the stumbling service sector.
In this scenario, the economy may gain some breathing room again in a few months. Some important factors, however, play against the recovery, such as a weak labor market and inflationary pressures stemming mainly from the combination of rising commodities' prices and the weakened real against the dollar. Uncertainties about the sustainability of public accounts weaken the Brazilian currency while keeping future interest rates high. This tightens financial conditions, hampering recovery.
The return of emergency payments seems inevitable. Even Economy Minister Paulo Guedes, who used to oppose the measure, talked about the resumption of the benefit on Thursday. According to him, the handouts would be granted to half the number of people benefited the first time - in a few months almost 68 million people received the monthly payments. The amount will be less than the R$600 given from April to August 2020 and, depending on the economic team, less than the R$300 offered from September to December. Besides, the benefits will have a short duration. In Congress, there will be pressures for more money for longer.
With the worsening of the pandemic and the slow vaccination, the resumption of the handouts is necessary to avoid a very sharp loss of income. The challenge is to combine the advantages of the handouts (and spending on health) with the commitment to keep sustainable government accounts. On Thursday, Mr. Guedes associated the return of the payments to "a robust fiscal environment," indicating that it could happen in such a scenario that the Congress could impose a state of emergency.
With an average of more than a thousand deaths a day, the conditions of a state of exceptionality may be justified, and it seems unlikely that the resumption of the handouts would happen within the limits of the spending cap. A state of emergency would...
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