March 20, 2020 / 5:37 PM / in 18 days

Brazil 2020 recession? Could be depression, as some brace for biggest crash ever

BRASILIA, March 20 (Reuters) - The outlook for Brazil’s economy is darkening rapidly, with the expected damage from the global coronavirus outbreak threatening to turn a likely recession into a depression and the biggest crash on record, according to new forecasts on Friday.

A paper published by the Center for Applied Macroeconomics and Getulio Vargas Foundation (FGV) showed that the worst-case combination of simultaneous international and domestic shocks could see Brazil’s gross domestic product shrink by 4.4% this year.

Monica de Bolle, senior fellow at the Peterson Institute for International Economics in Washington, went further, predicting that the sudden stop to much of the country’s economic activity will unleash a 6.0% contraction, that is, depression.

Both would represent the biggest annual slump in Brazilian economic activity on record. According to central bank data going back to 1962, the biggest annual fall in gross domestic product was the 4.25% decline in 1981.

The FGV based its worst-case forecast on a combination of a global shock, similar to the 2008 crisis, and domestic shock, like the truckers’ strike in 2018. This scenario was “closer to reality” than the other three models of no crisis, 2008 shock, and 2018 shock.

“Very reasonable assumptions about how these two channels will actually play out in Brazil suggest that the (current) crisis will have a high economic cost,” FGV said.

De Bolle at the PIIE in Washington also factored in the added risk of widespread social unrest, as the government struggles to contain the damaging economic and health fallout.

“Economists in Brazil are underestimating the magnitude of this crisis. It has no precedent,” she said.

These latest potential scenarios and forecasts trump even the most gloomy predictions in the recent wave of downward revisions from economists.

This week, Jose Francisco Goncalves, chief economist at Banco Fator in Sao Paulo, said the economy could shrink by as much as 3.6% this year, and Carlos Kawall, director at Asa Bank in Sao Paulo, predicted a 3.0% contraction.

The government pledged to inject 150 billion reais ($30 billion) into the economy to help workers and businesses, although virtually none of that is new money, while the central bank cut interest rates to a new low of 3.75%.

Many economists say the government and central bank, despite the challenges and limitations they face, will have to do much more in the coming weeks and months. (Reporting by Jamie McGeever; Editing by Andrea Ricci)

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