Economic Activity, Interest Rates and Consumption

BRAZIL ECONOMICS - Report 17 Jul 2017 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Despite divergences between some indicators, the overall signs are that the contraction of economic activity is nearing its end. However, the recovery will likely be very slow. Although the real interest rate for one year (the yield on 360-day swaps deflated by expected inflation one year ahead) has already fallen substantially – from 7% at the end of 2016 to about 4% –, monetary policy operates with long lags, and to close the negative GDP gap the real market interest rate will have to remain below the neutral level for some time. Additionally, the credit channel is still significantly obstructed, and the growing uncertainty from the political crisis is acting to discourage fixed capital investments, retarding recovery.

The IBC-Br for May dipped by 0.51%, reducing to zero the variation over the preceding 12 months (Graph 1). The good growth in the previous months was partly due to the statistical noises created by the adjustments made by the IBGE in its surveys of real retail sales and the service sector, which contributed to the increase of 0.8% in the IBC-Br in the first quarter. However, the carry-over to the second quarter is -0.1%. This, supported by our leading indicator, means the probability is high that GDP contracted in the second quarter.

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