The COVID-19 pandemic exposed Brazil to an unprecedented health and economic challenge. To contain the pandemic, Brazil implemented social measures to slow the spread of the virus and contain its impact on the health system capacity, which is uneven across the country. COVID-19 hit as Brazil was still recovering from its 2014-16 recession. Economic recovery remained weak and fiscal policy space limited since the peak of the recession in 2015-2016, with GDP growth below 2 percent in the following years.
The pandemic, and the health policy response to it, resulted into a sharp decline of external and domestic demand while also constraining supply. It has brought uncertainties to the macroeconomic policy framework, especially in the fiscal area, which translate into downside risks, thus calling for strong fiscal consolidation and the adoption of structural reforms in 2021, as soon as the spread of the disease is controlled.
To protect the most vulnerable people, the Government put forward a large, timely, targeted and time bound fiscal package focused on social assistance. The cost of this package was estimated at BRL 815.5 billion (US$156.8 billion), or 11.4 percent of GDP in 2020. The large fiscal stimulus limited the annual contraction in 2020 to 4.1 percent. Recovery momentum is expected to propel growth to 3.0 percent in 2021 but this is subject to large uncertainty, particularly on the impact of the new wave of the pandemic and the pace of vaccination.
