Change of Government and Resumption of Investments: What can be Expected?

BRAZIL ECONOMICS - Report 25 Apr 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The probability is now higher that Brazil will soon have a new government, with sufficient support to make substantial changes in economic policy, enabling the start of a cycle of reforms. The appreciation of Brazilian assets is a first reaction in this direction, but it will take much longer for economic activity to react. Since Brazil’s economy is relatively closed to international trade, the increase in net exports has a small effect on activity, which will continue suffering the depressive effects of the contraction of household consumption provoked by the rising unemployment rate and retraction of credit. In this note we examine how restoration of confidence can start to impel gross fixed capital formation. We show that because of the heavy weight of construction and truck output in the GFCF metric, its reaction will be very slow.

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