Brazilian economy likely to shrink 3.2 pct this year and grow 1.2 pct in 2017

The restoration of Brazil’s economic growth is vital to guarantee congressional and popular support to the structural reform agenda of the new Brazilian government, said Scotiabank in a research note. In the second quarter, the Brazilian GDP growth shrank 3.8 percent year-on-year and contracted 0.6 percent on an annualized quarter-on-quarter basis.

There are weak signs of moderation in the rate of economic contraction, yet the policy challenges to restore growth continue to be complex. Household consumption fell 5 percent on annual basis, while gross fixed capital formation dropped 8.8 percent year-on-year. Industrial production is expected to drop 5 percent this year, according to Scotiabank.

The latest consensus survey, conducted by the Brazilian central bank indicates towards a 3.2 percent decline in GDP this year, and a modest growth of 1.2 percent next year. A process of gradual easing of monetary policy is set to start. The country still suffers from the highest rate of interest environment amongst the largest economies in the world. The central bank’s benchmark interest rate Selic is at 14.25 currently. This suggests that a real interest edges the 9 percent mark. Derivative markets suggest reduction of 25-50 basis points by December 2016 and nearly 125bps in the coming 12 months.

“The IPCA-based inflation rate (8.7 percent y/y in July) is estimated to decline to 5 percent by the end of 2017”, added Scotiabank.