The Worsening Pandemic and Uncertainty over the Economy

BRAZIL ECONOMICS - Report 13 Jan 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

We start by urging those who typically attribute “subjective probabilities” to the occurrence of events to read the book Radical Uncertainty, written by Mervin King (former governor of the Bank of England) and John Kay. They recommend that when faced with a situation of radical uncertainty – as is the case now – people should not trace out scenarios with subjective probabilities, which are fated to lose sense, but rather try to understand what is happening. It is known that several vaccines now exist with proven efficacy, which is good news, but a new wave of contagion is occurring virtually throughout the world. It is also known that vaccination is a slow process, and that Brazil lags other countries. For this reason, vaccination needs to be accompanied by other efforts to contain the contagion, so as to shorten the epidemic cycle. The absence of coordination in facing the pandemic in the country has led to relaxation of social distancing rules and voluntary practices, indicating the high likelihood of recrudescent contagion and deaths in the coming months. This will obviously have a negative effect on economic activity. For this reason, we limit ourselves here to analyzing what we already know about what has been happening, and the conclusions are that: a) renewed economic deceleration is in store; and b) the projections for growth in 2021 will be revised downward. In these circumstances, how will the government react?

The new wave of contagion has been particularly strong in Europe and the United States. The German government has extended measures to restrict mobility until the end of January; the British government has decreed a new lockdown; and in the USA, new deaths per million is higher than it was in the second quarter last year. Although immunization with effective vaccines has started in 47 countries, their distribution so far has been slow, and there are mutations of the virus that can complicate the problem even more. In the case of Brazil, little is known so far about vaccination, and the moving average mortality rate has been rising since November, recently having returned to the previous peak of 1000 deaths a day (Graph 1). Although neither the federal government nor the state governments have imposed lockdowns, there is voluntary social isolation by the majority of the population, which will hamper economic performance, mainly in the service sector.

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