Private sector business activity in Latin America’s largest economy has, following a period of recovery witnessed throughout mid-2021, normalised amid worsening conditions within the manufacturing segment.

Notably, business activity in December remained unchanged, expanding at the slowest pace in seven successive months. Also, the growing threat from double-digit inflation, rising interest rates, and high unemployment, remained, while political uproar – stemming from a fierce run-up to a presidential election, is far from lessening.

From the coronavirus front, a notable improvement in vaccination coverage was in recent months witnessed. The vaccination programme, previously seen as flawed given supply shortages is under-way with its success now being envisaged as infection rates remain contained. Resultant to the rising vaccination rate, now exceeding 67 per cent of the population of which are fully vaccinated, the seven-day rolling average of daily new cases dropped below 13,000 from over 75,000 in June. Also, coronavirus-inflicted daily deaths significantly fell, on average, to below 100 from almost 3,000 in April. Notwithstanding this, the region is far from being out of the woods, particularly as the Omicron variant, first discovered in southern Africa and now raging across Europe and the US, spreads across the globe. Even with more than two-thirds of the population fully vaccinated, the region remains below the set threshold most scientists believe is needed to offer mass protection. Continental Europe, were vaccination programmes have largely been successful, have struggled to contain such variant. Brazil may indeed follow a similar trajectory, should the Omicron become the more prominent variant being transmitted across the country. Linked to a growing vaccine coverage and continued virus containment, business sentiment improved.

Business activity edges lower, yet remains in expansionary territory

The IHS Markit Brazil Composite PMI stood at 52 in December of 2021, unchanged from the previous month reading, the slowest rate of expansion in a seven month series in the country’s private sector. Growth was supported by a sustained expansion in the services sector masking the continued contraction in manufacturing.

The IHS Markit Brazil Manufacturing PMI came in at 49.8 in December of 2021, unchanged from the prior month, the lowest since May 2020. December’s figure was the second below 50 – marking a contraction, in a year-and-a-half, as companies for the third consecutive month continued to scale back on production to accommodate for subdued demand for goods. This, possibly a result of economic uncertainty and rising interest rates. In response to the decline in demand noted, job creation in the manufacturing segment nearly stalled. On the other hand, international sales rose for the second month running and at the fastest pace in over a year. Price pressures, previously mounting amid global shortages of raw material, higher transportation costs, and a weaker currency, showed signs of abating. Both input costs and output charges rose at the slowest rate since July 2020.

In the same month, services stood at 53.6, unchanged from November’s reading, and pointing to the seventh straight month of expansion in the services sector amid growing coronavirus immunisation and pent-up demand as pandemic-related restrictions ease. The sustained upturn in services was supported by a continued rebound in sales growth, as output rose. A rise in total sales was also supported by a recovery in international demand for Brazilian services. Notably, new export business expanded for the first time in four months and at the third-fastest rate since the start of the series in September 2014. The ongoing increase in new business encouraged businesses to hire personnel. Employment rose solidly, albeit softening to the slowest pace since August.

Persistently high inflation remains a threat to economic outlook

Global shortages of raw material, higher transportation costs – partly due to capacity limitations, a weaker BRL, and stimulus support, were the drivers predominantly behind a persistently higher inflation rate in Brazil. Efforts by the Monetary Policy Committee (Copom) – the body of the Central Bank, which defines the basic interest rate of the economy, have thus far proved insufficient.

While stimulus support, needed to stimulate demand and thus consumption, was then needed, it is widely viewed by economists to have been overdone, contributing to an elevated level of inflation. The lack of compensatory levels, not only worsened price pressures, but have also generated mistrust about the government’s fiscal commitment. In turn, worsening the scenario, as the currency weakened, making imports more expensive.

Albeit now seemingly reaching somewhat of ceiling, such elevated levels of inflation indeed threaten growth as expectations for domestic consumption remain subpar.

Buoying Brazil’s economic outlook was a recent successful auction of oil and gas for the government’s programme of infrastructure projects. A previous attempt to execute the complex auction had in 2019 flopped.

Private investment, which Brazil’s finance minister, Paulo Guedes believes it should propel economic growth in 2022, however may possibly weaken given the highly anticipated general election. Contrasting the pre-electoral promises on structural economic reforms, which have floundered for years in Congress, private investment has boomed, generating billions. Attracting private investment is certainly one of the brighter spots in the highly controversial and pro-business President Jair Bolsonaro’s economic plan.

Major infrastructure projects in 2022 lined up to draw private companies to invest in and operate include; 26 airports, 25 ports, 10 highways, and nine national parks and forests. Additionally, Bolsonaro’s government expects to host 10 auctions for mineral rights.

Disclaimer: This article was written by Christopher Cutajar, credit analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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