Brazil unemployment, end of emergency aid threaten economic recovery

BRASILIA (Reuters) - Expiring emergency payments to millions of low-paid Brazilians and the likely restoration of growth-choking austerity measures, as unemployment rises, risk torpedoing growing optimism that Latin America’s economy may not tank as much as feared.

FILE PHOTO: A job promoter sits close to list of job offers posted along a main street in downtown Sao Paulo November 19, 2014. REUTERS/Paulo Whitaker

The average forecast for 2020 gross domestic product is now showing a decline of 5.7%, a weekly central bank survey of economists on Monday showed, milder than the 6.5% drop seen a month previous.

The improvement is widely chalked up to the stronger-than-expected impact of 600 reais monthly “social transfer” programs to low-paid workers, subsidies far-right President Jair Bolsonaro agreed to under pressure from Brazil’s congress.

While it would still represent the steepest annual downturn on record, it is the most optimistic outlook since May. The central bank chart below shows the 2020 GDP growth forecasts in blue, and the 2021 forecast at a robust 3.5% for a seventh week.

Graphic: Brazil GDP forecasts -

Much of the recent optimism can be traced to a decision to extend the emergency payments by an extra two months, says Julia Braga, associate professor of economics at the Universidade Federal Fluminense in Rio de Janeiro state.

The monthly payments from April to August will total around 254 billion reais ($48 billion), according to Economy Ministry estimates. That’s around 3.5% of GDP put directly into people’s pockets in a matter of months.

Almost half of the entire population, across nearly 30 million families, received the aid in June, statistics agency IBGE reckons.

“If the emergency aid ends and there is no similar type of income transfer programme in its place to meet the needs of informal workers and poor families, there will be no growth, there will be no rebound,” Braga said.

“Even if a COVID vaccine is found, economic fragility is huge. The labor market won’t recover quickly ... and if the government returns to austerity, there will be no broader recovery,” she said.

Local media reports say the Economy Ministry is looking into extending these payments through the end of the year, but at a lower 200 reais a month. Even the reduced level would be a major U-turn for officials who insist the spending well has run dry and may reflect the unexpected popularity boost Bolsonaro has enjoyed from the programme in some of Brazil’s poorest regions.

The economic case for public investment, known as “fiscal multipliers,” is a strong one, especially when the economy is depressed.

During normal times, 1% growth in public investment leads to 1.3% growth in GDP, according to Rodrigo Orair at the IPEA institute for applied economics in Brasilia. During recessions, the impact is even stronger, with a 2.2% rise in GDP growth.

But Economy Minister Paulo Guedes and his team take a completely different view, arguing that tight control over public spending is paramount, especially given the record deficit and debt caused by the crisis.


While some indicators such as the latest formal job figures have been surprisingly upbeat, the labor market remains fragile.

Carlos Kawall, director at ASA Bank in Sao Paulo and a former treasury secretary, is skeptical that halting the payments will be quite so damaging to the economy, as they are focused on low-income brackets which consume less, especially services.

But he agrees that the labor market is the economy’s Achilles’ heel, particularly in the services sector - comprising everything from bartenders to educators - which accounts for around 70% of all economic activity and where most jobs have been lost.

“The labor market is the most comprehensive guide we have for the health of the economy, and the level of nationwide employment is still very depressed,” Kawall said.

“Services are lagging the recovery and they respond for the bulk of unemployment. The recovery might be very slow,” he added.

The government in April launched a $10 billion program allowing companies to reduce workers’ salaries and hours, or temporarily suspend contracts, in order to preserve as many jobs as possible.

The Economy Ministry estimates that more than 8 million jobs have been preserved. But these measures are expected to expire by the end of the year.

Brazil lost nearly 1.5 million formal jobs in the March-June period, well over a million of them in retail and other services. The Economy Ministry chart below shows 1.2 million formal jobs lost in the January-June period, over 80% of which were in retail and other services.

Graphic: Brazil formal job losses -

Data to mid-July show that barely 81 million of Brazil’s 170 million working-age population is at work, Kawall notes, a figure that has fallen by an alarming 3 million in recent weeks. The underemployment rate is a record high 27.5% and set to rise further.

As the economy’s reopening brings more people back into the workforce, the official unemployment rate of 12.9% is likely to rise also.

Reporting by Jamie McGeever; Editing by Christian Plumb and Jonathan Oatis