ECONOMIC ACTIVITY CURVES AND WHAT TO EXPECT FROM THE RECOVERY OF BRAZIL'S GDP

During modern history, it has been possible to observe dozens of recessions and economic depressions around the world, of global and national dimensions. Conceptually, economists classified these scenarios according to the period of contraction of productive activity, with declines in GDP for at least 6 months called recessions, and periods with more drastic declines lasting one year or more as depression. The current scenario of the COVID-19 pandemic and the probable global economic recession requires great effort from economic planning teams to design effective monetary, fiscal and exchange policies for the recovery of economic activity. Historical observations show behavior usual for economic recovery through the formats of the GDP growth curves. The most observed formats are the recessions in V, U, W and L. They bear these nicknames because of the graphic resemblance of the letters to the recovery of GDP. In V-shaped recessions, the economy undergoes a severe but brief decline in productive activity, followed by a strong recovery, usually caused by the resumption of consumption. Recessions with this format are the most seen in global markets. A historical example is the recession due to the 2008 crisis, which caused a sharp drop in Brazilian productive activity in 2008, but a resumption of even higher growth rates in the years 2009 and 2010.

Source: IBGEThe U-shaped curves are longer, when the recession reaches its peak, economic activity remains stagnant or growing timidly for a longer period before the recovery. Normally, this type of recession lasts 12 to 24 months. The Brazilian crisis experienced between 2014 and 2017 is an example of this format of economic recovery, evidencing the drop in activity from 2014 to 2015, reaching its peak in the second quarter of 2016 and with a gradual recovery, returning to the levels of growth close to at the beginning of 2014 only in the first quarter of 2018.

Source: IBGEAs shaped in a W shape are also known as”Double-Dip Recession” or “double-slope recession”, since the economy, after a fall in productive activity, undergoes a brief period of growth, returns to recession to finally recover. A good example for this type of graphic behavior is the European crisis of 2010. A combination of government austerity, falling business investment, rising interest rates, global economic weakness, high energy prices, and weak consumer spending after the Great Recession of 2008-2009 pushed many Eurozone countries into a second recession in 2010 and 2011.

Source: World BankRecessions with L-shaped curves are considered to be the worst and most dramatic, characterized by large periods of falling GDP followed by a protracted period of low economic activity. Due to its long duration and delay in resuming growth, this type of economic activity is characterized as depression. Japan in 1990, after the decision of its central bank, the BoJ, to increase interest rates, suffered a great loss of economic activity and a severe recession. It took the country approximately 10 years to recover from this shock, and the 90s were called “The Lost Decade” by Japanese economists.

Source: World Bank In its history, Brazil experienced several recessions due to various internal and external factors, like any other world economy. When analyzing the historical series of the percentage behavior of GDP in Brazil starting in the 2000s, it is possible to observe all the curve formats mentioned above.

Source: IBGE At times of crisis and consequent recessions or depressions, such as the one we currently observe, great uncertainties deregulate the markets, and the main point of discussion in the field of economics are the policies to be adopted to resume growth. The V-shaped recovery is undoubtedly the least impactful in the long term, but often due to the magnitude of the shock or the inability of economic agents to build efficient macroeconomic policies, we may end up seeing slower economic recoveries, such as those in U and W, or even in the long term, such as those in L format. In the current scenario, given the uncertainties of the recovery, several projections are being revised for the Brazilian GDP in 2020. The Focus Bulletin, for example, projects a drop of around 3% in GDP for 2020, the IMF and the World Bank 5%, and other economists, who are more pessimistic and have projected even greater falls. The resumption of growth depends on the duration of the pandemic, the successful containment of the virus, and the efficiency of macroeconomic policies. ARTICLE WRITTEN BY JACKSON MOL — ASSOCIATE FROM FC PARTNERSGo to our site: http://www.fcpartners.com.br