Intense Monetary Easing and Gradual Resumption of Growth
The recession is ending – GDP has almost stopped shrinking – and the steep drop in inflation has allowed an intense cycle of real interest rate easing. Although the outlook is for renewed growth, this will not happen immediately. Expansion in the first two quarters of 2017 will be small, leading us to project GDP growth of only 0.5% in 2017, with acceleration in the final part of the year pointing to 2.5% growth in 2018. The most important impulse to this resumed growth will come from the much lower real interest rate. The projections made in this report show that assuming a stable exchange rate of about R$ 3.20/US$, inflation in 2017 will be below 4.5%, even with the SELIC rate reaching 8% in December 2017.
What are the risks? Keeping the risk perception low and the exchange rate stable will depend on President Temer’s political success in winning approval of further reforms, particularly of the social security system. Despite his unpopularity, Temer continues to have congressional support. However, the political turmoil generated by the accusations emerging from the plea bargains reached with executives of Odebrecht presages increased conflicts and difficulties ahead. So far, the government has adroitly dodged the obstacles, and our assumption is that if it has to yield on some points to win approval, this will not change the main objective of the reform, which is to assure the future solvency of the pension system.
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