Asset Prices and Cyclical Recovery

BRAZIL ECONOMICS - Report 04 Feb 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The behavior of asset prices reveals great optimism about the new government’s economic program. However, the latest numbers on the labor market, industrial output and fixed capital investments indicate that the recovery is still very sluggish. The Brazilian economy this year will not be able to count on any contribution from stronger exports, or any fiscal stimulus. Faster recovery will only be possible, in the latter part of the year, spurred by a possible increase of gross fixed capital formation, resulting from removal of risks due to a robust pension system reform, ushering the way to fiscal consolidation. If the government manages to win congressional approval of that reform, and the recovery still remains slow, it is possible that that in the second half of the year the Central Bank will apply an additional monetary stimulus dose. But we see no way to use monetary stimuli without support from fiscal consolidation.

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