Brazilian economy to continue to shrink this year, likely to grow around 0.8 pct next year

Last year, the Brazilian economy contracted significantly and is not expected to be different in 2016, according to Commerzbank. The second quarter 2016 economic growth came in at -0.6 percent sequentially, while it contracted 3.8 percent year-on-year, following a contraction of 0.4 percent sequentially and 5.4 percent year-on-year in the first quarter.

The decline in prices of commodities mainly resulted in the deep recession in the South American country. The fall in prices brought a lethal combination of large declines in the nation’s term of trade and high inflation. The real GDP is expected to shrink around 3.5 percent for the whole of 2016, but the latest data imply that the worst is over and that the economy might expand by about 0.8 percent next year, stated Commerzbank.

Meanwhile, inflation surged in 2015 along with the depreciation of the Brazilian real. By early 2016, the consumer price index inflation levels had reached a high of about 10.7 percent year-on-year, quite above the central bank’s inflation target of 4.5 percent. Since then, Brazilian inflation has decelerated markedly, but at 8.97 percent in August, the print was a bit higher than in July 8.74 percent year-on-year. The Central Bank of Brazil anticipates the appreciation of real since the beginning of 2016 and higher unemployment to contain inflationary pressures.

“That said, we think BCB will fail to achieve their 4.5 percent inflation target in both 2016 and 2017”, added Commerzbank.

The Brazilian economy, which is predominantly a commodity exporting country, is greatly suffering from lower commodities prices. The terms of trade have worsened significantly. China is the largest commodity purchases globally, and if it continues to remain weak, Brazil is expected to face constant challenges from this side.

The slowdown in the Brazilian economy was due to a 2015 budget deficit of 10.3 percent of GDP. The deficit is likely to come in close to 9 percent of GDP this year; however, this is dependent on the government implementing its austerity program, according to Commerzbank.