From mid-2014 until late 2016, Brazil experienced a severe economic crisis. The country's Gross Domestic Product (GDP) fell by 3.5% in 2015 and 3.3% in 2016, after which a small economic recovery began. That recovery continued until 2020, when the COVID-19 pandemic began to impact the economy again.

The economic crisis occurred alongside a political crisis that resulted in the impeachment of president Dilma Rousseff. These events combined caused mass popular dissatisfaction with the political system.

The cause of the crisis was the aforementioned political crisis, as well as the 2014 commodity price shock, which negatively affected Brazil's exports and reduced the entrance of foreign capital into the economy. However, the most important cause was internal, which is associated with economic measures that didn't achieve the expected results. Adopted in 2011, these measures are known as the ("new economic matrix", in a free translation).

During the economic crisis, high unemployment rates were reported throughout the country, and there was widespread uncertainty regarding Brazil's economic future following a series of political scandals. In the first quarter of 2017, Brazil's GDP rose by 1%. This was the first GDP increase to occur in eight consecutive quarters. Finance Minister Henrique Meirelles announced that Brazil had "emerged from the greatest crisis of the century". However, the rise in GDP marked only the end of a technical recession, not the end of the crisis. The recession was the second most severe in the country's history, and was followed by the slowest recovery. The GDP only surpassed that of early 2014 by mid-2022.

Context Economic

Brazil's economy is largely dependent on the export of commodities, particularly iron ore, petroleum and soy. From the late 1990s till 2012, prices for these export commodities rose significantly (partly because of increasing demand from China), resulting in about two decades of economic growth. As a result of the Great Recession, Brazil's GDP dropped sharply and unemployment rose. During Luiz Inácio Lula da Silva's left-wing presidency from 2003 to 2010, the government redistributed wealth through welfare programs and raised the minimum wage in order to increase consumption.

In response to critics of Lula's socialist economic stance, his successor, Dilma Rousseff (president during the crisis), introduced macroeconomic tax exemptions and subsidies. These policies are widely acknowledged as a major factor in the 2014–16 economic crisis.

Political The economic crisis was followed and intensified by a political crisis. In 2014, a series of corruption scandals uncovered by Operation Car Wash engulfed many influential politicians. In the presidential election of the same year, President Dilma Rousseff was re-elected to a second term, defeating the PSDB candidate Aécio Neves by a narrow margin. The result was not recognized by a section of the opposition and provoked popular discontent. Due to the disputed legitimacy of the election, the Operation Car Wash investigation, and the economic crisis; dissatisfaction with the government became widespread. By 2015, Rousseff's approval rating had plummeted to 8% according to a Datafolha survey.

Causes

Errors in macroeconomic policy

According to Gustavo Franco, President of the Central Bank during the FHC government, the main cause of the crisis was internal and related to "local macroeconomic measures that went wrong."

A 2017 academic study on the subject arrived at the following conclusion regarding the origin of the crisis:

Previously, the state had played a crucial role in expanding the domestic market through consumer incentives, such as raising the minimum wage, income transfers, and credit expansion. However, by the end of the Lula government, there was a growing perception that this strategy would be unsustainable. On May 26, 2011, an article published in Folha de S.Paulo titled "an agreement for the Brazilian industry" reaffirmed the importance of that economic policy of the Lula government but criticized the shrinking share of the national industry in GDP and the substitution of domestic production with imported industrial products. The article was signed, among others, by Paulo Skaf, president of the Federation of Industries of the State of São Paulo (FIESP), who years later would request and support Dilma's impeachment.

Dilma, an economics graduate from an industrialist school, agreed with the demands. Therefore, the new economic matrix was a set of measures to benefit the industrial sector, aiming to reduce the costs of national companies and increase competitiveness against foreign competition. However, the industry did not react. Industrial production, which had grown by 2.7% in 2010, declined by 0.9% and 3.7% in the following two years, damaging government revenue and, consequently, public investments.

In an attempt to reverse the deterioration in public accounts due to falling revenue, a fiscal adjustment was implemented in 2014, which included highly recessive policies (i.e., aimed at reducing expenses and increasing taxes). These policies mainly involved cutting public expenses and investments, such as cuts to the Growth Acceleration Program (PAC). The adjustment continued throughout 2015. In that year, there was a sharp reduction in administered prices. (See section Anticrisis measures.) These measures further deepened the crisis because, according to Carvalho, there was a decrease in public investments. Additionally, the sharp adjustment of administered prices and the significant depreciation of the currency led to soaring inflation, reaching over 10%. This increase, in turn, caused the Selic Rate to rise successively until reaching 14.25% per year. The fiscal adjustment was not successful even in its main objective, which was to achieve a surplus in public accounts, as the recession in which the country found itself reduced government revenues.

Commodities Devaluation

Average annual growth ofcommodity pricesIMF (Primary Commodities Price Index). Data extracted from the book "A Valsa Brasileira" (see bibliography)PeriodChange(% per year)1999-200210.32003-200519.12006-201010.52011-20142015-2016 An external cause identified was the slowdown of the Chinese economy, Brazil's largest trading partner. This slowdown led to a sharp drop in commodity prices, which are the basis of Brazilian exports. As a result, Brazil's trade surplus plummeted and some exporting companies, such as Usiminas and Vale, suffered heavy losses. According to Roberto Dumas, a professor at Insper, the government made a strategic mistake during the commodity supercycle by stimulating consumption instead of prioritizing industrialization and improving productive capacity.

According to Steven Tobin from the International Labour Organization (ILO) Research Department, the decrease in external demand, especially from China, combined with the fall in commodity prices in the second half of 2014, were factors that contributed to the crisis. However, Tobin also stated that this unfavorable external scenario revealed structural weaknesses in the country, such as low productivity. Between June and December 2014, the commodity price index published by the International Monetary Fund (IMF) experienced a cumulative decline of 29.3%, which continued to increase until it was interrupted in January 2016.

In 2015, The Economist magazine also stated that the immediate causes of the crisis were external, and that the decline in commodity prices partly explained the crisis. The publication also argued that then-president Dilma Rousseff could have made better use of the commodity boom of the 2000s to reduce the bloated state, which consumed 36% of GDP in taxes. Instead, the government chose to guarantee subsidized loans and costly tax incentives for favored industries.

Silvia Matos, a researcher at the Brazilian Institute of Economics (FGV), concluded that external factors were responsible for 30% of the crisis.

Political Crisis

In the international context of major protests following the 2008 financial crisis, such as the Arab Spring in the Arab world, Occupy Wall Street in the United States, and Los Indignados in Spain, Brazil experienced major protests in 2013, the largest since the demonstrations for the impeachment of Fernando Collor in 1992. The protesters initially challenged increases in public transportation fares but later questioned the hosting of FIFA mega-events (Confederations Cup and World Cup) and political corruption. In response, the federal government announced measures to try to address the protesters' demands and the National Congress of Brazil passed a series of concessions, known as the "positive agenda."

The following year, in 2014, the Operation Car Wash investigation began, revealing a vast corruption scheme involving the political class and parties. The re-election of Dilma Rousseff a few months later exacerbated the political crisis. Running for a second term as a candidate for the Workers' Party, Dilma won the presidential election that year, defeating the candidate from the Brazilian Social Democracy Party (PSDB), Aécio Neves, in the most fiercely contested presidential race in the country's history at that time. The election was also marked by turmoil and controversies, mainly due to Operation Car Wash.

In this context of political crisis, the Congress began to vote on measures that could generate more expenses for the government. These were called "bills bombs" (pautas-bomba). If the president vetoed any of these bills, the President of the Chamber of Deputies, Eduardo Cunha, would entertain an impeachment request against her. These bills were used as instruments of blackmail. The proposed spending increases voted by Congress occurred at the same time the government intended to make cuts to achieve the fiscal target for the year. In a scenario of an economy in crisis, this hindered the rebalancing of public accounts by increasing state expenses and making the economic adjustments proposed by Dilma unviable.

In December 2015, after the PT voted for the impeachment of Eduardo Cunha (who was involved in corruption scandals), he accepted an impeachment request against Dilma for alleged crime of responsibility. On May 12, 2016, the Federal Senate removed her from the presidency for 180 days. Immediately, her vice-president Michel Temer assumed the position temporarily. Even though he was acting president but behaving as if he were the definitive president, Temer established his government plan and made "stopping the free fall in economic activity" a priority in his first speech as president.

However, early in his government, Temer became involved in controversies due to his ministers who were being investigated in the scope of Operation Car Wash, as well as himself. The scandals affected the progress of the government's proposed reforms aimed at economic recovery. Not only did they affect the progress itself, but they also required Temer to allocate many resources to maintain his allied base cohesive. The total amount of funds released in 2017 for parliamentary amendments (a legal mechanism used for political negotiations) increased from 959 million to 1.5 billion reais just in June, the month following the JBS scandal. All the corruption scandals involving the Temer government, combined with the unpopular reform proposals, caused Temer's approval rating, according to CNI/Ibope polls, to drop to 3 percent in September 2017, even lower than Dilma's.