An extremely slow recovery

BRAZIL ECONOMICS - Report 01 Mar 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

​The Brazilian economy is still experiencing an extremely slow cyclical recovery. This is not due to the absence of monetary stimulus: after all, the neutral real interest rate perceived by the market is in the ballpark of 4%, above the one-year ex ante real rate, which is the figure that is relevant to determine economic activity. The sluggish economic recovery is being penalized by the slowdown of world growth, the decline of international commodity prices, the negative fiscal impulse generated by the fiscal consolidation effort, and the high levels of slack industrial capacity, which discourages investments. In our view, 2019 will be another year of weak growth, reaching 2% at best. The GDP data for the fourth quarter of 2018 reinforce this perspective.

In the fourth quarter last year, GDP expanded by only 0.1% (or 0.5% in annualized terms), and growth for the year was only 1.1%, the same as in 2017. After 19 quarters since the beginning of the recession, the economy is still 5.1% below the previous peak, marking this cycle unparalleled in history in terms of length and depth since records have been kept (Graph 1). This put the carry-over to 2019 at only 0.4%, leading to a projection (with a good dose of optimism) that growth this year will reach 2%.

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