The Indications from the Financial Stability Report

BRAZIL ECONOMICS - Report 23 Oct 2017 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Recognition is practically unanimous in the financial market that the Brazilian economy has turned the corner and is now recovering, driven mainly by household consumption, in turn stimulated by the decline of the real interest rate and expansion of credit to households. However, even assuming a slight uptick in gross fixed capital formation, our projection for GDP growth in 2018 – still 2% – is below the median. The reason is our skepticism about the pace of the recovery of GFCF. The high slack capacity levels are a constraint on capital expenditures, and the restriction of the business credit market must also be considered. The Central Bank’s latest Financial Stability Report strengthens the evidence that the conditions for expansion of credit to households are much more favorable than those for expansion of credit to companies, meaning the credit channel cannot be counted on to boost recovery of investments.

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