Weak growth and monetary easing ahead

BRAZIL ECONOMICS - Forecast 10 Jun 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

In a climate of decelerating world growth, with rising risk aversion and a sharp decline in Treasuries yields, we have redone our projections for growth for 2019 and 2020. In them we assume that despite all the political noise, a robust pension reform will be approved, reducing the fiscal risk. All the same, additional fiscal measures will be necessary to stay under the spending cap, which is a fundamental indicator to orient asset prices and the risks on the real side of the economy.

For 2019, we estimate growth of 0.7%, followed by 1.8% in 2020. These projections are relatively optimistic, given the assumption of acceleration of quarterly growth to 0.5% (annualized rate of 2%) starting in the third quarter. Since the end of the recession, quarterly growth has averaged only 0.4% (1.4% in annualized terms). The unemployment rate should fall, to 11.9% on average in 2019 and 11% in 2020, and after falling in 2019, industrial output should grow by 2.5% in 2020.

With the large negative GDP gap and inflation of 3.8% in 2019, below the target, the Central Bank should start an easing cycle, cutting the SELIC rate at a pace of 25 basis points per COPOM meeting until it reaches 100 points at the end of 2019 (5.5%), with the rate returning to 6.5% at the end of 2020. Regarding the nominal exchange rate, even with approval of the pension reform it will remain near the current levels.

Despite the slower world growth, the trade surplus will continue to be high. Exports should reach US$ 230 billion in 2019 and US$ 240 billion in 2020, with imports tallying US$ 180 billion and US$ 190 billion, respectively. This will produce trade surpluses hovering around US$ 50 billion a year in 2019 and 2020, with current account deficits between US$ 20 and US$ 30 billion, more than fully supported by the inflow of direct investments.

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