Is Brazil going into recession again?

Good morning! Is the Brazilian economy going into recession again? The House votes on a decree to cut red tape by altering labor regulations. Argentina’s own Joesley Day. FBI looks for a suspected Al-Qaeda member in Brazil. Operation Car Wash to last for one more year—at least. Enjoy your read.

Is the Brazilian economy going into recession again?

The Central Bank’s Economic Activity Index (IBC-Br), which is a leading indicator of what the official GDP numbers will be, suggested that Brazil’s economy shrank 0.13 percent over the last quarter. If confirmed by the GDP figures (to be released at the end of the month), it will mean Brazil has fallen into a technical recession, where negative growth is seen for two consecutive quarters.

Why it matters. The negative numbers are not that surprising, as different sectors showed poor performance in recent months. But going into another recession just two years after regaining growth could be a huge blow to the Brazilian economy, further eroding confidence from consumers and business owners—which could reduce consumption and investments, creating a vicious recessive cycle. Economy Minister Paulo Guedes asked for patience. On his side is the fact that analysts expect GDP figures to be slightly better than that suggested by the IBC-Br.

Recession: what prevents growth. The Brazilian economy relies heavily on family consumption and government spending. But the federal administration is cash-strapped, and with 13m people unemployed—and 62.3m Brazilians defaulting on their debts—the wheels of the economy are not turning.

To keep an eye on. Market analysts surveyed by the Central Bank’s Focus Report lowered their expectations for GDP growth this year, from 0.82 to 0.81 percent. They also expect the bank to promote further cuts to the Selic benchmark interest rate, from the current 6 percent down to 5 percent at the end of the year.

• Go deeper: Recession made Brazil more unequal

Less red tape, fewer labor regulations

The House is set to vote today on a provisional decree signed by President Jair Bolsonaro which reduces bureaucracy for small businesses and loosens labor regulations. It is considered to be one of the core points in Economy Minister Paulo Guedes’ agenda to stimulate the private sector.

Why it matters. The government is adamant that labor regulations are stifling the competitiveness of Brazilian businesses on the international stage. The so-called “Brazil Cost” is a widely known phenomenon among global businesspeople, referring to the increased operating expenses of doing business in Brazil, which often reflects on the price of goods in the country. But left-wing parties claim the move will make workers even more vulnerable to predatory relationships with employers.

Timetable. The original text drafted by the government received 300 proposed amendments, so the Economy Ministry drafted a new, simplified version of it—maintaining the core points, but removing parts that could be challenged in court. As a provisional decree, the new rules must be voted on within 120 days or else they will expire—the deadline for both houses of Congress to approve it is August 28.

• Go deeper:Government aims to cut red tape by altering labor regulations

Argentina’s own Joesley Day

As predicted, the results of Argentina’s primary election (showing the Kirchnerist ticket close to a first-round win against incumbent Mauricio Macri) sent markets into havoc. The Buenos Aires stock market closed the day down nearly 38 percent, and the Argentine Peso dropped to USD 1: ARS 53. The country’s central bank raised its benchmark interest rate from 63.7 to 74.8 percent.

Why it matters. The bad mood with Argentina spilled over Brazil, with the U.S. Dollar gaining ground against the Brazilian Real (to almost USD 1: BRL 4) and the stock market operating on a low for the entire day. Moreover, economists believe that the return of Kirchnerism to power could compromise the Mercosur-EU free trade deal (which must be ratified by local parliaments). It could also deteriorate the relations between Brazil and its most important neighbor, with the Jair Bolsonaro administration considering a move to leave Mercosur should Mr. Macri lose in October.

Joesley Day in Buenos Aires. Yesterday’s market reaction to the primary election results was reminiscent of what Brazilians call “Joesley Day.” In May 2017, taped recordings of then-President Michel Temer negotiating with businessman Joesley Batista the payment of hush money to a former House speaker nearly brought his presidency down—with the stock market index crashing by almost 10 percent, and the BRL losing around 15 percent against the USD.

What else you should know today

Terrorism. The U.S. Federal Bureau of Investigation announced on Monday it is looking for Egyptian citizen Mohamed Ahmed Elsayed Ahmed Ibrahim, who arrived in Brazil last year. The FBI believes him to be an Al-Qaeda operative who has been involved in planned attacks against the U.S. The Brazilian government says it “stands ready to cooperate.” Late in July, Justice Minister Sergio Moro issued a hard-line decree making it easier for foreign citizens suspected of crimes abroad to be “summarily extradited.”

Eduardo Bolsonaro. Congressman Eduardo Bolsonaro, the president’s third-eldest son, met yesterday with businessmen from São Paulo. He asked for their support for his nomination to the position of ambassador to Washington, and promised to use his proximity with Donald Trump’s White House to accelerate a trade deal between Brazil and the U.S. On the same day, federal prosecutors filed a court injunction to bar his nomination.

Car Wash. Prosecutor General Raquel Dodge signed off on continuing the Operation Car Wash task force in Curitiba for at least one more year. According to reports, there are at least 14 new operations planned between now and December—and 60 investigations are ongoing in the Supreme Court (as they involve federal elected officials). 

Dodge. A report by Folha de S.Paulo shows that, while lobbying to receive another two-year term as prosecutor general, Raquel Dodge held an investigation into President Jair Bolsonaro, suspected of employing dummy servants. Only last week, after knowing she wouldn’t get the nod, did she set the probe into motion.

Corruption. The Federal Police carried out a search and seizure operation at the apartment of former Minas Gerais governor Fernando Pimentel. He is suspected of using fake contracts to siphon at least BRL 3m during his 2014 campaign for governor. Marshals seized documents and BRL 60,000 in multiple currencies.[/restricted]

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