Many economic indicators in Brazil have bottomed, so the worst may be over for the Brazilian economy. Growth rebounded strongly in the first quarter – the first positive GDP print in two years. However, we had never expected growth to be strong for 2017 as a whole.
Domestic conditions remain challenging: unemployment is high, credit is hard to access, and consumer and business confidence has improved, but remains subdued. We have further moderated our expectation of growth this year after the recent political developments: June numbers already show a dip in consumer and business confidence.
As a whole, we had expected 0.7 per cent GDP growth in Brazil for 2017 and now expect only 0 per cent (this is still better than the -3.5 per cent recession of 2015 and 2016). The outlook for 2018 is very difficult to predict because Brazil will have presidential elections and the continued political uncertainty can continue restricting growth, so we are pencilling in around 2 per cent GDP in 2018.
Risks to inflation are on the downside, and we believe the Central Bank of Brazil could continue to cut the interest rate at a pace of 100 basis points per meeting, until it is around the 8 per cent mark. This is high for other countries, but historically pretty low for Brazil, and a big improvement from 14.25 per cent rates in 2016.
Our view on Brazil’s economic growth has become more downbeat since the recent political developments, but our view on inflation and lower interest rates remains the same. Brazil will hold general elections in October 2018. Reform is crucial for the fiscal balance in Brazil and the elections may prove to be a distraction or even delay reform agenda. Reforms to policies on pensions, labour and a spending cap have been in focus with fiscal consolidation imperative in the face of a worsening debt-to-GDP ratio.