Deterioration of the external scenario

BRAZIL ECONOMICS - Report 19 Aug 2019 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

​The indications have increased that the projection for growth of 0.8% in 2019 is optimistic. One of the reasons is the worse external situation. The trade tensions between China and the United States have created a climate of uncertainty harmful to global trade and investment; Germany’s GDP receded by 0.1% in the second quarter according to the preliminary data released last week; and the risk that the opposition to Macri will win the final round of presidential voting in Argentina has grown intensely.

Last week, the result of the primary election for president in Argentina indicated that Alberto Fernández, whose running mate is former president Cristina Kirchner, will almost surely win the final election in October, bringing back the risk of populism and unsustainability of the country’s debt. The reaction of the markets was immediate and drastic, with the Argentine peso depreciating by more than 20% during the week (Graph 1). It’s not yet possible to quantify the negative impact the tighter financial conditions will have on growth of the Argentine economy. But since the economy is extremely dollarized, inflation will increase even more, likely requiring a rise of the interest rate above the current 75% p.y., in an economy that already shrank by 5.8% in the first quarter this year.

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