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Brazil economic outlook

Disruptions caused by the war in Ukraine, coupled with inflation, have placed Brazil on an uneasy economic tide.

Brazil’s economic performance has been varied at best since the onset of the pandemic. In the second half of 2020, after the devastating first wave of COVID-19, Brazil witnessed a rebound in economic activity, but then came subsequent waves of infection and surge in global inflation, which have dampened that recovery. And at present, after having recently exited recession in the fourth quarter of last year (second time in two years),1 Brazil’s economy faces two stiff headwinds. First, private consumption growth is still relatively weak. Consumer confidence is subdued as inflation rises and unemployment remains high. This will likely thwart production and private investment. Second, external factors such as existing supply chain challenges due to the pandemic and the Russian invasion of Ukraine will likely weigh on the currency and global demand. Although Brazil has limited direct exposure to Russia and Ukraine in trade, it won’t remain insulated from the conflict’s impact on the global economy.

Consumers feel the sting of rising prices

Brazilian households are again witnessing a return to double-digit inflation. Headline inflation has been rising at more than 10% year over year2 since September 2021 (figure 1), which is double the upper limit of the Banco Central do Brasil’s target range of 2.25–5.25% for 2021.3 While food- and energy-related inflation were the key drivers of overall rise in consumer prices for much of 2021, other spending categories too have started to play a role. Core inflation, which excludes volatile food and energy prices, has steadily increased over the last year and touched 8.7% in February 2022. Within the consumer basket, goods prices have experienced the highest increase due to rising demand for goods during the pandemic (at the expense of services), higher input prices, and production bottlenecks. In January, for example, prices of durable goods went up by 13.8%, while inflation for semidurable goods was 11.5%.4 Services inflation was relatively lower, but at 5.1% in January, growth in the prices of services is also edging up.



Inflation is not only proving detrimental to consumers’ purchasing power but is also adding to weak consumer sentiment due to the deep shock to the economy in 2020–2021. Consumer spending grew by only 0.7% quarter over quarter in Q4 2021, and it is unlikely that growth will pick up sharply and sustainably in the first half of this year. Monthly retail sales data reveals that sales volumes have been on a broad downward trend from its recent peak of July 2021. Since then, consumers have reduced spending on most items, including household appliances, work from home–related equipment, and fuel (figure 2).

It’s true that consumers will likely benefit from the continued improvement the labor market has witnessed since Q1 2021, but labor force participation is still 1.4 percentage points lower than the prepandemic level (63.6 in December 2019). And although unemployment has come down during this period, it is worth noting that even the prepandemic state of the labor market was much worse than the heydays of Brazil’s fast-growing economy (2000–2013). In December 2019, for example, the unemployment rate (three-month moving average) was 11.1%—much higher than the average annual figure of 6.3% in 2013, right before Brazil’s economy entered a period of broad economic contraction.


Weak demand and slowing production are taking a toll on business confidence

With a sustainable economic recovery yet to take shape, production and investments have been subdued. A quick look at contributions to real GDP growth reveals that the industry—led by mining and manufacturing—subtracted from growth in two out of four quarters in 2021. Unfortunately, given the weak domestic demand, elevated commodity prices, and the ripple effect of the conflict in Ukraine on the global economy, industrial production is unlikely to rise sharply any time soon. Manufacturing output fell in January and hasn’t been able to get back to the levels witnessed a year before. This has dented capacity utilization in the sector, which has been trending down since June 2021 (figure 3). As a result, investments have suffered.



The industry, however, has fared better than services since the pandemic started. The arrival and rapid spread of omicron in January led to a gradual return of mobility restrictions.5 For example, the world-famous carnival festivities in Rio de Janeiro have been postponed to April from February.6 This prolonged and uncertain nature of the pandemic and its economic impact on households and businesses have therefore prevented a swift recovery in the services sector. No wonder, then, that sectors such as accommodation and food services and air transport where social distancing isn’t easy have witnessed only incremental improvements in revenues over the past year and are yet to reach prepandemic levels. This is despite high levels of vaccinations in the country compared to the world average (figure 4).



With industrial production faltering over the past year and services yet to reach prepandemic levels of activity, business confidence is still shaky. While businesses in the services sector have been largely pessimistic for some time now, the Manufacturing Confidence Index has slipped below 100 this year—the line that marks the descent from optimism into pessimism (figure 5).


External uncertainties about growth and inflation add to economic worries

Downbeat sentiment for businesses also comes at a time of rising external uncertainties. Pandemic-induced supply chain disruptions were already working their way into the economy through inflation, and the conflict in Ukraine will likely make it worse. At first glance, the rise in global commodity prices seems to work well for Brazil. Oil, soybean, and iron ore account for 40% of total merchandise exports from the country,7 and rising prices of these commodities augur well for export revenue.8 Also, less than 3% of Brazil’s total imports come from Russia and Ukraine,9 implying a limited disruption to overall imports. However, the conflict in Ukraine and its global economic ramifications raise the specter of four key headwinds for Brazil’s economy. 

First, while Brazil is a major producer and exporter of crude oil, it imports refined petroleum products. And since refined products carry a premium over crude oil, the premium has gone up this year10—this is likely to lead to a higher cost of production within the economy. Fuel and petroleum products make up about 20% of the Producer Price Index; any rise in this segment will percolate down to consumers as producers will be forced to pass through at least some part of this price rise to consumers.11 This will be an add-on to consumers’ already rising fuel bills. In March, domestic prices of petrol and diesel were hiked by 19% and 25%, respectively.12

Second, disruptions to trading routes around the Black Sea and the Sea of Azov will likely increase logistical challenges, resulting in delayed delivery of production goods and food items13 including transport equipment, fertilizer, and wheat. This will likely add to inflationary pressures for a host of durable and nondurable goods.14

Third, imported inflation may find its way through currency weakness. An International Monetary Fund working paper (2003) suggests that in Brazil, about 6% of an exchange rate shock passes on to consumer prices during the quarter in which the shock occurs.15 While the real has appreciated somewhat against the US dollar in the first quarter of this year—a good sign so far as imported inflation is concerned—a continuation of the conflict in Ukraine and any larger-than-expected tightening by the United States Federal Reserve may drive global investors to rush to safe havens like the dollar. The dollar index, for example, has been edging up since mid-2021. Figure 6 shows that during times of crisis, the dollar index tends to move up, while the real tends to depreciate against the US dollar.


Finally, the conflict in Ukraine also casts a shadow on global growth. The United Nations Conference on Trade and Development recently downgraded global growth projection for 2022 by one percentage point to 2.6%.16 Any global slowdown, especially in some of Brazil’s key export destinations such as China, the European Union, and the United States will hit demand for Brazil’s exports, thereby denting the sector’s contribution to the country’s economic growth. 

Beyond the clouds of external risks lie domestic fundamentals 

The invasion of a sovereign European nation and its wide ramifications on global economic activity are certainly the last thing the world needed after two years of a devastating pandemic. Yet, as the dust from such global events eventually settle, the focus will shift to domestic economic fundamentals. How Brazil’s economy fares over the medium to long term will depend on two key factors. First, any success in fighting inflation will aid household balance sheets and enhance the credibility of policy institutions, especially the central bank. Failure to do so, as Brazil witnessed in 2014–2015, will be a big step back. Second, returning back to the path of fiscal consolidation is essential for medium-term economic stability. Brazil had been on that path in the past before the pandemic put a spanner in the works. But, as the pandemic eases, cracking the fiscal math and sticking to it will be key to injecting confidence back into the economy.

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  1. Haver Analytics, sourced in March, 2022. Unless otherwise stated, all data is sourced through Haver Analytics.

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  2. Unless otherwise stated, inflation is in year-over-year terms.

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  3. Banco Central do Brasil, “Monetary policy and inflation targeting track record,” accessed April 1, 2022.

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  4. Fundação Getulio Vargas Brazilian Institute of Economics (FGV IBRE), Macro Bulletin: Inflation doesn’t let up,  February 2022.

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  5. Our World in Data, “Statistics and research: Coronavirus pandemic (COVID-19),” accessed March 2022.

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  6. Reuters, “Brazil’s Rio de Janeiro and Sao Paulo postpone official carnival parade to April,” January 22, 2022.

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  7. UN Comtrade Database, accessed April 1, 2022.

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  8. The World Bank, “Commodity markets,” accessed April 1, 2022.

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  9. Min Desenvolvimento, Indústria Comércio, sourced via Haver Analytics, accessed April 1, 2022.

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  10. US Energy Information Administration, “What drives crude oil prices,” accessed March 31, 2022.

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  11. Ibid.

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  12. Peter Millard, “Petrobras hikes fuel prices in encouraging sign for -market,” Bloomberg Quint, March 10, 2022.

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  13. Costas Paris and Benoit Faucon, “War in Ukraine disrupts ships around the globe,” Wall Street Journal, March 1, 2022.

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  14. FGV IBRE, March Bulletin: The war intensifies the inflationary shock, March 22, 2022.

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  15. Agnes Belaisch, “Exchange rate pass-through in Brazil,” International Monetary Fund, accessed March 2022.

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  16. United Nations Conference on Trade and Development, “Ukraine war cuts global growth prospects by 1%,” March 24, 2022.

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The authors would like to thank Patricia Buckley, US Economics, for her review.

Cover image by Jaime Austin.

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