2015: Recession, High Inflation and Political Risks

BRAZIL ECONOMICS - Forecast 19 Feb 2015 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

Executive Summary

There has been a change in the economic policy bearings, starting with a fiscal adjustment and correction of administered prices.

But the positive results will not appear in 2015. In the next 12 months the forecasts point to: a) a recession, with a 1% dip in GDP, along with an increase in the unemployment rate, which should reach 5.9% at the end of the year, with a growing trend; b) rising inflation, attaining 7.6% at the end of 2015 and remaining above the 4.5% target in 2016; and c) a weaker real, due to the high current account deficit, which will decline slightly, and international forces like the appreciation of the dollar, drop in commodity prices and loss of global trade dynamism.

There are also many uncertainties, mainly coming from the domestic political scene. At the start of her second term, President Rousseff’s congressional support has been falling, and her public approval ratings tends to reduce due to the recession and high inflation. On top of these factors, the administration is facing the political fallout from the unfolding Petrobras scandal. Weaker political support will tend to hamper execution of the fiscal adjustment, raising the risks.

Although our forecasts envision moderate depreciation of the real, the increase in risks will tend to aggravate this, affecting the behavior of inflation (raising it). The misalignments in the political area will worsen the conditions for macroeconomic adjustment, with reflections on inflation and GDP performance. So, while the macroeconomic policy orientation is much better than in recent years, there is fragility from the political side, making the results uncertain.

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