A Positive Scenario "ma non troppo" for 2021

BRAZIL ECONOMICS - Forecast 18 Dec 2020 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Marcelo Gazzano

For a brief period (2 quarters at most) the pandemic shut down the economy, producing a deep but short recession, but thanks to the strong fiscal expansion the recovery has been rapid. However, Brazil still has no plan for vaccination, and for an extended period it will be necessary to live with the consequences of the fiscal deterioration. Therefore, the projections depend on what the government manages to do in the areas of sanitary and fiscal policy. Our hypothesis is that the country will make slow progress in fighting the pandemic and that the government will try to keep spending approximately within the constitutional limit.

This year will end with contraction of GDP to the tune of 4.1% or thereabouts, and in 2021 the economy should grow by 4.5%, strongly influenced by a carry-over of 4.1%. In 2020, household consumption likely will show decline of about 6%, but should grow by 3% in 2021. Gross fixed capital formation will close this year at 5% below last year. With a very high level of uncertainty, we project it will expand by 4.5% next year (practically the same as the carry-over), keeping the investment rate stable. Industrial production should decline by 5% this year, leaving a carry-over of 8% to 2021, meaning at the margin that the sector will basically be stalled in 2021.

Inflation will finish this year slightly above the target of 4%. In 2021, inflation should hit 4%, also above target, but with a rise of 150 basis points in the SELIC rate, bringing it to 3.5% at the end of 2021. This projection is highly dependent on an exchange rate of R$ 5.30/US$ at the end of 2021, which will mean no elevation of the risk premiums, in turn depending on maintenance of the fiscal anchor.

Expansion of exports of US$ 30 billion in 2021 together with a decline of US$ 15 billion in imports in relation to 2020 will result in a trade surplus of about US$ 107 billion in 2021. In 2020, the current account should be in equilibrium, while in 2021 we project a surplus of US$ 55 billion. Based on these projections, the international reserves should remain stable in 2021.

Our estimate (which is another hypothesis) is that despite all the contrary pressures, the government will (approximately) maintain the commitment to the spending cap.

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