Aggravation of Imbalances or Pursuit of Reforms?
Executive Summary
The scenario for the rest of 2014 has little room for uncertainties, but the picture is more complicated for 2015. In preparing the projections of this Quarterly Outlook we have assumed that President Rousseff will be reelected and will continue the current economic policy regime, with a few course corrections. At the end we indicate the probable alterations in case an opposition candidate wins.
In 2014, GDP growth will only be 1%, and should decline further to 0.8% in 2015. The main factors behind this forecast are the inability of industry to grow; deceleration of household consumption; and stagnant growth of investments. Despite the slowdown of GDP growth, the unemployment rate will only rise slightly, due to the continuing reduction of the participation rate.
Inflation in 2014 should be 6.4%, and a tad higher at 6.5% in 2015. The government will have to gradually allow recomposition of the suppressed administered prices, such as of gasoline and electricity, and the real will depreciate to R$ 2.55/US$ in the average of 2015 and R$ 2.60/US$ at the end of 2015. To dissipate the inflationary effects, the SELIC rate will have to be increased to 12%.
The trade surplus will be virtually nil in 2014, but will rise to US$ 13 billion in 2015, along with a fall in the current account deficit, from US$ 85 billion in 2014 to US$ 75 billion in 2015. The two engines propelling the fall of the current account deficit will be the continuing poor GDP growth in Brasil, discouraging imports, and the weakening of the real exchange rate. Finally, we assume the government will be forced to raise the primary fiscal surplus to 2% in 2015.
If an opposition candidate wins the presidency, there will be profound changes in the economic policy regime. Fiscal policy will become more transparent; lending by public banks will be less plentiful; and the Central Bank will have more freedom to conduct monetary policy. There will be reforms in the areas of the tax system, opening of the economy and stimulus to productivity. This will work to reduce inflation expectations and longer term interest rates, as well as promoting appreciation of asset prices, in advance of gradually stronger growth.
There is little margin for uncertainties about the rest of 2014, but the picture for 2015 is much more complicated. The big doubt, of course, is the outcome of the elections, so that it is hard to tell whether the current economic policy will be maintained, albeit with some small adjustments (if the government stays in office) or if there will be profound changed (if an opposition candidate wins). There are also uncertainties from the international economy, which can change the intensity of capital flows to emerging markets at a moment when Brazil is running high current account deficits.
The basic scenario underpinning the projections for 2015 is that the president will win reelection. Despite the dip in the government’s approval ratings and growing public intentions to vote for an opposition candidate, this is still the most likely outcome according to the latest opinion polls. For this reason, we assume that a second Rousseff administration will continue the current economic policy bearings, with some small course corrections, which are necessary to prevent more pronounced deterioration of the economy. A victory by one of the two leading opposition candidates, Aécio Neves or Eduardo Campos, would bring significant changes, improving the economic outlook. At the end of this work we indicate the most likely changes in this case.
Now read on...
Register to sample a report