Brazil to grow over 6% should vaccination accelerate – Itaú projection

RIO DE JANEIRO, BRAZIL – The Brazilian economy should grow by at least 6% this year should vaccination speed up and the service sector rebound within 2 to 3 months, said Mario Mesquita, Itaú Unibanco’s chief economist.

“Accelerating vaccination would enable a normalization of the services sector, which is the missing piece of the puzzle,” said Mesquita, former Central Bank director between 2006 and 2010.

The bank’s current projection for 5.5% GDP growth this year considers a normalization of the services sector only in the final quarter – the most severely affected by the pandemic and which has not yet fully recovered.

Brazil has administered 86.5 million doses of the Covid-19 vaccine and the daily average increased from 663,000 administrations in May to 1 million up to June 18.

Vaccination figures may gain speed after São Paulo governor João Doria decided to bring forward the state immunization calendar. “The news is important, because the state has a large weight in terms of population,” said Mesquita.

Stepping up vaccination, which should help contain Covid-19 in a country where the number of deaths now exceeds 500,000, could also produce a positive statistical impact on the 2022 GDP.

Risks on the horizon

The main risk to consolidating Brazil’s growth, after a 4.1% plunge in GDP due to the pandemic in 2020, would be for the country to abandon fiscal adjustment. This would translate into returning to a higher interest rate scenario and to “living off lending money to the government” again, said Itaú’s economist.

The rainfall shortage, for now, is added pressure on inflation, but the risk on activity “is not zero.” Should the drought persist during the wet season, starting in October, the situation could complicate further.

For the ex-director of the Central Bank, the recurring energy risk in Brazil means that energy pricing is wrong. “We should perhaps have a higher price, considering that hydropower is more scarce.”

Within the basic scenario, Itaú for now projects lower growth next year, of 1.8%, below the market’s median projection of 2.2%, amid rising interest rates and reduced fiscal stimulus.

The country is also likely to resume its normal potential GDP pace in 2022, following this year’s stronger cyclical recovery. “Unfortunately, Brazil is not a champion in potential GDP. To grow between 1.5% and 2% is low, but it’s returning to our trend,” he said.

Investors’ perspective

Foreign investors are seizing the current window of attractive dollar prices for Brazilian assets, which makes Brazil a destination for diversification into variable income, amid low interest rates, Mesquita said.

“Foreigners want to be part of this momentum, but it will not last forever. Once it is over, in a year or two, we will depend more on growth to attract capital.”

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