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Overview

In Brazil, structural bottlenecks led to a meagre GDP average growth (0.3 percent) over the last decade, despite favorable demographic conditions. Productivity growth is weak, due to a complex tax system, a cumbersome business environment that discourages entrepreneurship, slow human capital accumulation, ineffective sectoral state intervention policies, low savings, and compression of public investment to accommodate higher current spending and increasing pension obligations.

The COVID-19 pandemic gave Brazil one of the highest tolls globally in terms of lives lost, but a rapid vaccine rollout since mid-2021 is supporting a return to normality. As of September 2022, Brazil had applied the first dose of the vaccine to 86.8 percent of the population, and 79.4 percent of the population has a complete initial vaccination protocol.

After a pandemic-induced recession in 2020 (-3.9 percent y/y), the economy bounced back in 2021 (+4.6 percent y/y), on the back of the services sector. The sizeable countercyclical fiscal response implemented via social protection programs in 2020 mitigated the impact of the pandemic on poverty, but this also increased households’ dependence on public transfers and raised the primary deficit and the Government's Gross Debt. The uneven labor market impacts increased preexisting vulnerability profiles as higher job losses were concentrated in low-skilled and highly insecure jobs, though Brazil's labor market is displaying significant signs of recovery, with the unemployment rate reaching 8.9 percent as of September 2022.

In 2022, significant downside risks remain in this highly uncertain environment. The global economic backdrop further weighed on Brazil’s recovery, including inflation and rising policy rates—both in Brazil and in the world—and supply bottlenecks related to the ongoing war in Ukraine, causing commodities prices to soar and thus further reinforcing the inflation pressures (8,73 percent in August 2022).  Additionally, concerns remain about anemic potential growth and slow policy reform momentum. Restoring fiscal sustainability still represents the most urgent economic challenge for Brazil, despite the ongoing fiscal consolidation achieved throughout 2021.

The significant drop in poverty and inequality rates from 2020 was short-lived. In 2021, labor force participation rates, employment levels and the share of formal workers fell below 2019 levels. Unemployment rates returned to pre-pandemic level in the last quarter of 2021, but they remain high. Labor income may not fully replace the reduction in government transfers – leading to higher poverty rates. A slower return to the labor force, coupled with fewer job opportunities, have put female workers and female-led households in a more vulnerable position.

Government transfers served as a swift and generous temporary relief, which helped poverty go down from 26.2 percent in 2019 to 18.7 percent in 2020 (poverty rate is rate based on the US$ 6.85/day PPP line). However, poverty is expected to increase to 28.4 percent in 2021. While a new round of Auxílio Emergencial income support was approved in April 2021 and continued through the year, the covered population was lower than the year prior and the benefits lower. Together with a weak labor market recovery and increasing prices – especially of food – the income of households in the bottom of the distribution decreased significantly in real value.

Striking the right balance between protecting the poor and ensuring sustainable public finances, including at subnational levels, will be a key policy challenge in the years ahead.

Supporting the transition to a greener and more resilient growth model also remains a key challenge. Brazil is home to more than 60 percent of the Amazon rainforest, the largest tropical forest in the world and has a high share of renewables in its energy matrix, but high exposure to climate risks and deforestation call for a strong reform agenda to address these challenges.

Due to the increase in deforestation emissions, Brazil is not on track to meet its NDC targets (a reduction of GHG emissions of 37% by 2025 and 43% by 2030, relative to 2005) and has yet to develop an integrated long term national strategy to achieve its climate goals. Recent reforms in the infrastructure sector, together with the administration’s renewed interest in the climate agenda, provide sound opportunities for Brazil’s green recovery and for lifting millions of Brazilians out of poverty.

Last Updated: Oct 07, 2022

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