Perspectives for 2015: Recession and Political Costs
Executive Summary
The political costs of the fiscal adjustment and the measures to control inflation are being carried by a weakened government. The recession in 2015 and the outlook for very modest growth in 2016 have put the administration in the trap of having to undertake a more drastic fiscal adjustment, hampering the return of growth. Instead of creating a virtuous circle that would culminate in stronger economic growth and lower political costs, the government runs the risk of entering a vicious circle in which weak growth raises the political costs of the adjustment.
Recession will mark 2015, with GDP contracting by around 1.7%. The drop in the second quarter will be greater than in the first, and a further contraction will occur in the third quarter, although slightly less intense. Recovery will only start in 2016, but it will be very slow, with GDP growing by a mere 0.8%. This year, household consumption will shrink, accompanied by a steep drop in gross fixed capital formation. On the supply side, the sector afflicted the most is industry. The unemployment rate will climb to an average of 6.8% in 2015 and reach an average of 8.5% in 2016.
Despite the depreciation of the real, the outlook is for a reduction of exports in 2015, which along with lower imports will mean a trade balance near zero, with bias in the deficit direction. Not only have commodity prices been falling and world exports decelerating, the exchange rate movements have not yet reached relative prices, so there has been no boost to exports. Nevertheless, the current account deficit will decline to US$ 85 billion in 2015 and again to US$ 76 billion in 2016.
The strong corrective inflation (of administered prices) and the inertia from wages should raise inflation in 2015 to around 9%, with the Central Bank raising the SELIC rate to 14% in response. In 2016, inflation should settle back below 6%, allowing the SELIC rate to be lowered to 12%. These projections were made assuming a modest depreciation in the exchange rate, but if the political risks increase, this movement might be more intense.
In spite of the efforts to cut expenditures, the primary surplus this year will only reach 0.7% of GDP, rising to 1.5% of GDP in 2016. The recession in 2015 and mediocre recovery in 2016 will undermine revenues.
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