The Political Crisis and the Economic Picture

BRAZIL ECONOMICS - Report 05 Jun 2017 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

With a large negative GDP gap and falling inflation, the interest rate will continue to fall, but the Central Bank has already indicated that due to the uncertainties, the next cuts will be smaller. Our projections before the crisis were that the SELIC rate would reach 8% at the end of 2017 and stay thereabouts in 2018, and that the economy would start recovering in the second half of 2017, leading to GDP growth of 0.5% this year and 2.5% in 2018.

The increased uncertainty presages that in comparison to our former projections the interest rate will be higher and economic growth weaker in 2017 and 2018, but the margin for error in both cases is high at this moment. Narrowing this margin cannot be achieved by refining economic models. Rather, it requires more precise information about the path for resolution (or not) of the present political crisis. This information is totally obscure at the moment.

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