A scenario filled with uncertainties and undergoing intense mutation
With the United States in full employment, growing faster than the potential and with an expansionary fiscal policy, the dollar has been appreciating, inverting the international conditions that were favorable to emerging countries. Brazil does not have a balance of payments problem, but it does have a severe fiscal problem, leading to unsustainable growth of the public debt, whose solution requires structural reforms, chief among them the pension system. Therefore, the growth projections for 2019 were carried out assuming the absence of a favorable international scenario, but with the new government committed to fiscal consolidation.
Until recently, the economy was recovering modestly, but even before the truckers’ strike there were signs of deceleration, which got worse with the paralysis for 11 days. For this year we project GDP growth of about 1%, but the margin of uncertainty is high, and the figure could be near 1.5%. In 2019, growth should accelerate to 3%, benefited by the reduction of fiscal and political uncertainties, along with some resumption of investments, favored by the absorption of idle capacity and the continuing deleveraging of firms.
Despite the supply shortages that raised prices in June, inflation this year should still be only 4.2%, slightly below the target of 4.5%. For 2019, we assume that whatever the new government’s makeup is, the Central Bank will continue to have independence to conduct monetary policy so as to assure convergence of inflation to the target, which will be 4.25%. The SELIC rate will remain at 6.5% for the rest of 2018 and then rise to 8% in 2019.
The trade balance should increase both this year and next. The relatively weaker exchange rate favors exports and disfavors imports. Stronger global growth will also help expand Brazilian exports, but heed should be paid to the developments of the trade warfare, which could impair world commerce. There are no significant risks impending from the balance of payments.
In the current situation, with unsustainable growth of the public debt, the government has no alternative other than to meet the fiscal targets, satisfying the rule freezing expenditures in real terms, the primary result target and the “golden rule”. The gross debt will continue growing even if all the fiscal targets are met in the coming years.
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