Synthesis of the Brazilian Economy
Although we expected an increase in the political tension around the approval of the spending cap PEC in the Senate, we did not imagine that the political conflict would spill over into a confrontation between the legislative and judicial branches, with reputational costs that are hard to assess. In parallel, with the finalization of the plea bargains involving Odebrecht, rumors of accusations have started to appear not only regarding cabinet ministers but also about President Temer himself, raising the political uncertainty.
The political tension has not significantly affected asset prices, probably because the reform initiatives are progressing in Congress as envisioned and most observers assume that Temer will serve out his term. The economy continues to decelerate, and the probability is high that GDP will contract again in the last quarter this year. Unemployment will rise for several more months, and recovery – albeit slow paced – should start in the middle of next year. The good news is that inflation is waning, allowing a more vigorous interest rate cut, which will encourage investments.
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