Isabel da Costa, a restaurant manager in São Paulo, is divided over the state of Brazil’s economy. On the one hand, she says she sees a strong uptick in the coronavirus pandemic, with new bars and businesses popping up all over the city.
On the other hand, she says, rising inflation levels have undermined any sense that the lives of the average citizen are improving: “People are coming back. New bars and restaurants are opening and the public is starting to consume again. But inflation is a big problem. Everything is too expensive.”
As the country gears up for elections in October, the economy dominates the national debate. In polls, voters have repeatedly ranked economic issues as the most important, above crime and corruption, which have featured prominently in previous elections. Right-wing President Jair Bolsonaro hopes recent economic data will boost his chances, analysts say.
Driven by a strong recovery in the services sector, the Brazilian economy is projected to grow by 1.7 percent this year, a significant improvement from January, when leading banks forecast a recession.
Spurred on by the full reopening following Covid-19 restrictions, unemployment has fallen below double digits for the first time since January 2016 and activity in the service sector has reached its highest level since 2015 according to government data.
Nevertheless, inflation remains high at 11.4 percent per year. Despite largely successful government efforts to cut fuel costs through tax cuts, food prices have also continued to rise, hurting the tens of millions of impoverished Brazilians who struggle to get food on the table. The price of carrots and potatoes has increased by about 70 percent, while milk has risen more than 30 percent in the past 12 months.
“There is a phenomenon these days, namely more jobs but lower incomes, with salaries being affected by inflation,” said Sérgio Vale, chief economist at MB Associados.
According to da Costa, “If you add gas, electricity, rent, everything you need for a business, it becomes very difficult.”
Bolsonaro has realized the importance of giving citizens a boost. Last month, his government approved a BRL 41 billion ($7.7 billion) spending package that will increase monthly cash payments to Brazil’s poorest by 50 percent to 600 reais until the end of the year, in addition to creating fuel subsidies. for truck and taxi drivers.
But the president still faces an uphill battle to win reelection. A study by Datafolha showed that he trailed his main rival, left-wing former leader Luiz Inácio Lula da Silva, by 18 percentage points. Other polls in recent weeks showed that the former army captain appeared to narrow the gap to less than 10 percentage points.
“The fact is that a country that is doing well economically tends to re-elected its presidents. Recent economic indicators may help Bolsonaro, but it’s hard to say if they’ll be enough to change his mind enough to get him a win,” said Felipe Nunes, founder of pollster Quaest.
Elected in 2018 as a populist outsider, Bolsonaro’s first term in office was marked by controversy, most notably his alleged mishandling of the pandemic. His rejection rate is 53 percent among voters.
Armando Castelar, an economist at Brazil’s Institute of Economics, believes the improving economy and government spending package “will make the election more contentious than polls suggest”.
“The economy in 2022 will be better than feared. The unemployment rate is falling surprisingly fast and much of this has to do with the recovery in services, the last sector to recover after the pandemic,” he said.
According to official government statistics, activity in the services sector – which accounts for more than 60 percent of gross domestic product – grew 9.4 percent this year to May, fueled by a rebound in transport, tourism and restaurants.
Brazil also received a boost from high commodity prices resulting from the war in Ukraine, while tightening monetary policy weighed on growth less than expected, Castelar added.
General inflation appears to have peaked, although the continued rise in food prices means poorer Brazilians have yet to feel the effects, Vale said.
The brighter prospects for Latin America’s largest economy will justify Treasury Secretary Paulo Guedes, who rejected recession forecasts by local banks last year and predicted Brazil would grow 2.1 percent this year.
“Naturally [the banks] his mistake. Either they are wrong, or they are politically militant. They are trying to influence the election,” Guedes told the Financial Times in November last year.
“Brazil is more likely to have some growth and resilient inflation” [in 2022] than lower inflation and no growth,” he said at the time.
Camila Abdelmalack, an economist at Veedha Investimentos, pointed to effective government efforts to boost growth — including allowing workers to withdraw money from a mandatory layoff fund — even before the recent spending package was approved.
“These policies boosted the population’s income and will contribute to some economic growth,” she said.
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For Paulo Alberto Seibel, a 58-year-old businessman who runs a thriving brick factory in the interior of the coastal state of Espírito Santo, Bolsonaro deserves credit for the improving economy.
“They say the land isn’t growing,” he said. “Well, we can’t produce enough.”
Despite being a seasoned supporter of the president, he can’t ignore the squeeze of inflation: “If diesel were a little cheaper, it would be even better.”
Additional reporting by Carolina Ingizza