2020 – Another Year of Weak Growth and Low Inflation
The Coronavirus outbreak is a supply shock, against which central banks have few tools. If the world were facing a systemic banking crisis, like in 2008-09, there would be a risk of a global recession, but in the current situation there is simply a risk of greater deceleration of growth. It isn’t possible to assess the gravity of this crisis by looking only at asset prices. Years of extremely low real interest rates led to a bull stock market, and the bubble that was developing has now burst with the advent of the Coronavirus. Serenity is needed and also awaiting for new information about the progress of the health problem to clarify the extent of its effects, meaning for the time being living with a high degree of uncertainty. The epidemic requires fiscal resources to face its effects, and its evolution depends on the power of science and medicine.
The Brazilian economy’s performance was weak in 2019, and the perspective for recovery is now worse with the epidemic. Although the country’s industry is not strongly connected to global supply chains, economic activity is affected by world trade, which will be hampered according to how much the problem affects China and Europe. For this reason, we have reduced our growth projection for 2020 to 1.5%, and for 2021 to 2%. The main channel affecting Brazil’s economy is international commerce, but the perspectives for some recovery of gross fixed capital formation have also worsened.
Unlike the central banks of the advanced countries, in Brazil room exists for using monetary stimuli. We forecast a cut of 100 basis points in the SELIC rate this year, taking it to 3.25%. Although the Real has been depreciating, we believe it is an overshooting, caused by the outflow of foreign capital, which is partly the consequence of greater risk aversion. The depressed state of the economy prevents companies from passing through the weaker exchange rate to prices, and the Central Bank has the wherewithal to use monetary policy to stimulate the economy.
The deceleration of global trade will impair Brazil’s exports, which even with the weaker Real will fall shy of the level observed in 2019. But there also will be a dip in imports due to the slower GDP growth and the more depreciated real exchange rate. The combination of all these factors should lead to a current account deficit close to the result in 2019, of around 3% of GDP.
The government should meet the primary surplus target in 2020 and 2021.
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