The Consensus and the IMF Projections: Which Is Most Realistic?

BRAZIL ECONOMICS - Report 29 Jun 2020 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Paula Magalhães

Last week the IMF published new projections for growth in 2020 and 2021, with marked reductions, conflicting with the “optimism” indicated by the appreciation of stock prices in the United States, Europe and Brazil. According to the fundamentals, the prices of shares reflect the present value of expected earnings, which have been climbing with the expectations for economic growth. A hypothesis for this pattern often expressed is that the increase of stock prices is based on the feeling that the recession will be less severe and the recovery faster than previously envisioned. The flaw of that argument is that it ignores the reaction of the central banks around the world, which have flooded their respective economies with liquidity. What we are seeing is a fight between liquidity and fundamentals. In the first round, liquidity managed to knock down the fundamentals, but the fight has many more rounds. In this crisis, the economic trajectory is determined by the dynamics of the pandemic, and neither the USA nor Brazil has managed to slow the pace of contagion, instead insisting on movement to reopen economies prematurely. The IMF’s latest projections sound a clear warning that given the incompetence of the Brazilian government’s reaction (and American also) to the pandemic is risking a deeper and longer recession. The driving force of the recovery of the Brazilian economy before the pandemic hit was household consumption, but the damage imposed by the current crisis on the labor market has removed this impetus, which together with the outlook for a lingering pandemic points to a deeper and longer recession. For these reasons we maintain our projection for GDP to contract by 7.5% in 2020. Since the government erred in its reaction to the pandemic, it now has to provide more aid to the neediest citizens, implying further income transfers and a bigger primary deficit this year, with a high probability of reflections in 2021, jeopardizing the spending cap and increasing uncertainty.

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