The Recession of 2015 and the Lessons of 1999 and 2003

BRAZIL ECONOMICS - Report 02 Mar 2015 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

Executive Summary

The growth of the Brazilian economy started to decline in 2010, and disappeared totally in 2014, a year of stagnation. Diagnostic errors and unwitting experiments in conducting economic policy explain that performance. To reverse this situation – and preserve the country’s investment grade rating – a tough adjustment has to be undertaken, whose costs will appear before the benefits start to show up. In light of this, the political challenges are huge.

In this note we examine the fiscal adjustments that happened in 1999 and 2003, in an attempt to extract some lessons about the depth and extension of the recession that will be triggered by the adjustments put into practice by the new finance minister. What’s starting now is a recession with more persistence than the two earlier episodes. There are no perspectives for recovery any time soon, either from the standpoint of net exports or from that of gross fixed capital formation and household consumption.

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