A shot of realism
Until recently, many observers believed that with the approval of the pension reform, the real would appreciate and GDP growth would accelerate. However, there has been a wave of downward revisions of the growth projections for 2020 (for 2019 the consensus remains around 0.8%), and instead of strengthening, the real has weakened. Despite the relative success of the pension reform, the country is still far from finishing the considerable endeavor of fiscal consolidation, and this charges a price on economic growth and the exchange rate.
Our projections are for growth of 0.8% in 2019 and 1.7% in 2020, with average exchange rates of R$3.97/US$ in in 2019 and R$4.20/US$ in 2020. The deceleration of global growth will reduce exports, and the recent pattern of import growth has surpassed what was historically generated by expansion of industry. Therefore, we are prepared for a moderate increase in the current account deficit. Although the real’s volatility remains high, reducing the attractiveness (or even increasing repatriation) of portfolio investments, there are no problems on the horizon to finance the current account deficits. This entire picture depends on the government resisting pressures to relax the spending cap. Absent this success, the risks will tend to grow and economic performance will worsen.
The most positive point of this Quarterly Outlook is the behavior of inflation. Models are subject to structural breaks, and the peculiarity of the current cycle – never before experienced in Brazil – questions the recovery of potential GDP, in turn casting doubts about when the Central Bank will start the cycle of monetary normalization. But even against the backdrop of those uncertainties in our projections, we continue to envision a long period of low interest rates.
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