Projections for 2020 and 2021

BRAZIL ECONOMICS - Forecast 08 Jun 2020 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Paula Magalhães

The size and duration of the present recession depend largely on the degree of federal, state and local coordination regarding social isolation, and the quality of economic policy. This coordination is for the most part lacking, and various state governors are now opening their economies despite the acceleration of contagion, with the risk of a new wave of deaths. In light of this situation, we project GDP will contract by 7.5% in 2020, followed by growth of 2.5% in 2021 (at an average quarterly rate of 1.1% in the four quarters, equal to an annualized rate of 4.5%). Due to the high unemployment rate, the contribution of consumption will be less intense than during the recovery from the recession that started in 2014.

In 2020, even with an average exchange rate of R$5.40/US$, we estimate that exports will fall by US$ 20 billion, followed by further decline of US$ 25 billion in 2021. However, there will be a trade surplus because of a decrease of US$ 40 billion in imports in 2020, and a new decline of US$ 15 billion in 2021. The increase of the trade surplus, which should rise to US$ 67.8 billion in 2020 and settle slightly to US$ 58.2 billion in 2021, will be one of the factors responsible for the significant fall in the present current account deficit, transforming it into a surplus. Nevertheless, the drop of direct investments will outpace this surplus, leaving a balance of payments deficit and shrinkage of the international reserves.

With the severe recession, the inflation trend is downward. Even a sharper depreciation of the exchange rate will not jeopardize the projections that the IPCA in 2020 and 2021 will stay under the lower bound of the respective target intervals. We project the IPCA will be 1.5% in 2020, followed by 2.3% in 2021, right at the lower limit of the interval containing the target.

Our estimates for 2020 take into consideration the expenditures already undertaken to fight the pandemic, which should raise the primary deficit to 10.3% of GDP. Without any contraction of reserves, the debt/GDP ratio at the end of the year would be 97.1% but considering the reduction in repo transactions due to the likely decline of reserves, the debt/GDP ratio should amount to 94.5%. There is a definite risk of failing to meet the spending cap in 2021.

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