Brazil: What did Carnival Reveal? A Recovery, That’s What
Zeina Latif, Chief Economist, XPI
Published: 7 March 2018 04:24
Carnival in 2018 was the most festive in recent years. The streets were full and associations connected with tourism celebrated a marked increase in movement. With fear of the recession receding, consumers are gradually materializing their buying intentions once more.
This movement is not yet disseminated and is appearing in phases, which was expected given the difficult financial position of firms and workers. This crisis was more serious than others in recent history.
The labour market is the key variable to determine the pace of recovery. Fear of unemployment is still high, according to the National Confederation of Industry (CNI), which will affect consumption decisions. It’s no accident that recovery of confidence among consumers lags behind that of business executives, who are moving towards more optimistic territory faster. The good news is that new jobs are finally being generated in the formal sector.
The recovery started with durables (automobiles, appliances), which have high costs. The normal expectation would be for non-durables (mainly foods), with lower value, to lead the way, albeit moderately, since demand for those goods is less sensitive to the behaviour of income and prices (in economists’ jargon, demand is less elastic). However, the combination of high pent-up demand for durables and easier credit terms, along with the release of inactive FGTS accounts, caused this sector to rebound first. This movement might be limiting recovery of other sectors, because of the lesser household budget room to buy other goods.
Tourism appears to be gaining strength. The increase in travel spending during carnival indicates the economy is gaining traction and signals an outlook for more disseminated growth of consumption from now on. This will be a more solid and lasting movement than the temporary uptick that occurred from the release of FGTS accounts, because it is the fruit of the decline of inflation and interest rates.
Another revelation from carnival is the sentiment of voters. The full streets during the carnival celebrations contrasted with the apathy in relation to recent political events. We’ve seen the scandals of the JBS bribes, the apartment containing BRL51mn in cash, and the conviction of former President Lula, the last case triggering controversies and questioning among the legal class. All the same, these have provoked only rare spontaneous manifestations in the streets.
The reason for this might be, to a great extent, the economy. Despite the continuing fragility at the moment, with unemployment still high, the economic rebound is palpable.
As already identified by qualitative surveys, the main anxiety of the new middle class is to consume through planning rather than hand-to-mouth. This ability is gradually returning, helping to improve the humour of people, who prefer to “take care of life” than to protest.
The climate in the country is the reverse of 2014. The apathy of Brazilians in the run-up to the 2014 World Cup is emblematic. Fans were slow to become animated, even though Brazil was the host country. The climate was of protest and apprehension over rising inflation and economic stagnation. As a reflection, consumer confidence was in free-fall.
A possible reflection of the year we’ve had is that the elections will only enter the radar screens of voters with the official start of the campaign, after the World Cup. People have other interests. And considering the feeling of mistrust among voters, opinion polls will not help much up to the start of the campaign. This lack of definition will probably affect the strategy of parties, which will tend to delay choosing their presidential candidates.
Here an aside is in order. The parties will carefully pick their presidential candidates. And there might be fewer parties fielding candidates, due to the new rules on private campaign financing and barrier clauses. This picture reinforces the hypothesis that many parties will be slow to adopt positions.
The apparent lack of interest of voters can be contrasted with the improvement in confidence. Maybe we might even have a less aggressive and radicalized campaign in comparison to that in 2014, which did so much damage.
Carnival is now over but has left good news in its path: a further sign of consistent rebound of consumption and possibly a more confident society.
About the Author
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