The Recovery is Slowly Consolidating
No knowledgeable observer has the illusion that monetary policy alone is a suitable instrument to guarantee sustained growth. However, in the absence of an external impulse and considering the tradeoff inherent to fiscal consolidation, that long-run growth comes at the price of contraction in the short to medium run, the recovery of the Brazilian economy will have to rely solely on monetary stimuli. There are reasons for optimism. First, the neutral real interest rate is now at persistently lower levels. Second, the yield curve has flattened, giving rise to long-term loans at lower real rates. And third, the Central Bank is continuing its efforts to promote banking competition and narrowing of the spreads.
We project GDP growth of 2.2% in in 2020 and 2.5% in 2021. The continuing growth of consumption and the start of a rebound of civil construction are the main forces acting on the demand side, which is also being driven by better credit terms and slight improvement in the labor market.
In 2020 and 2021, inflation should reach the target, with the basic interest rate (SELIC) falling to 4% in 2020 and monetary normalization occurring in 2021. We see no risk of this picture being altered by the exchange rate, which is tending to weaken, due to the combined effect of the net outflow of portfolio capital, the decline in the terms of trade and the increase in the external liability due to the growing current account deficit.
These projections were formulated based on the assumption that movement toward fiscal consolidation will continue. In 2020 it will be necessary at least to enact the “Emergency” proposed constitutional amendment (PEC), without watering down its triggers in case of failure to comply with the fiscal rules referring to the possibility of cutting public payroll spending. This will increase the probability of staying under the spending cap, which is the main fiscal anchor to help keep interest rates low in the future.
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