Brazilian Macroeconomic Overview – September edition

Economic recovery continues in second half, but fiscal solution is awaited

The global economy continues to recover, although coronavirus infection rates remain at high (but stable) levels. Since mid-July, the average number of new daily cases has been around 250,000 worldwide. Declines in the United States and Brazil have been offset by an acceleration in some European countries and India, which has become the new global epicenter of COVID- 19, with around 100,000 new cases daily. Worldwide, more than 30 million cases have been recorded and the total death count is approaching 1 million.

Despite the high levels of infection, the daily number of deaths has shown a gradual deceleration and it is far below the peak recorded in April. This contrast between cases and deaths can be explained by the significant increase in the amount of testing and more effective medical protocols, in addition to isolation of people in high-risk groups.
This situation has allowed the economy to resume activities, and some sectors, such as industry and commerce, are now operating at a level higher than that observed before the crisis in several countries. However, in the services sector, which has been hit hard, recovery is only partial, and this will remain the case at least as long as concerns about the virus persist. Consequently, only mass vaccination will lead to a broad normalization of economic activity.

Thus, the risks related to the pandemic are migrating from the short-term impacts on economic performance to the possibility of a delay in the discovery of a safe vaccine.
Other possible sources of uncertainty around the world include increased political risk in the United States. The fierce dispute between the Democrats and Republicans for the presidency and Senate partly explains the delay in approving new fiscal stimuli, which many players, including the monetary authorities, believe will be crucial to sustain the ongoing recovery. In addition, the risk of the election results being contested has increased, and this could cause additional volatility in the asset markets, already affected by the stretched valuations of some stocks and the risk that the new administration will be more unfavorable to large technology companies from a tax and regulatory perspective. Furthermore, trade and political tensions between the United States and China persist. On the other hand, the good news is that the stimuli already adopted should make the U.S. perform better this year than initially expected. For example, the OECD has revised its projection for the country’s growth from minus 7.3% to minus 3.8%. For global GDP, the forecast went from minus 6% to minus 4.5%.
In Europe, the economy is improving as expected. The European Central Bank has revised its GDP projection for the region from minus 8.7% to minus 8.0% in 2020, and it now expects growth of 5.0% in 2021. These figures are very close to the OECD’s forecasts. However, the evolution of the pandemic poses a major risk for the continuation of the recovery. 

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