The Return of Growth: But How Strong?
In the midst of risks posed by the difficulties of executing the fiscal adjustment and vagaries of the political crisis, the positive contribution of monetary policy deserves attention. The SELIC rate should continue falling, to 7% at the end of the year, when inflation will be 3.2%, well below the target of 4.5%, to where it should return in 2018. In expectation of the further decline of the SELIC rate, the real market interest rate has already reached 3.2% a year, a good deal lower than the neutral real rate.
The dominant force for recovery of GDP growth will be expansion of household consumption, with a very small contribution from gross fixed capital formation. In a more conservative scenario, this year GDP will grow by 0.6%, followed by expansion of 2% in 2018. However, the possibility of stronger recovery of consumption, along with a modest rebound of gross fixed capital formation, cannot be discarded. In this case, GDP growth in 2018 might be better, which would help growth of revenues and make it easier to meet the primary fiscal target. But in counterpart, depending on the magnitude of acceleration, the SELIC rate might start to rise at some point in 2018.
We assume continuation of the benign international climate, which will favor modest growth of international trade and capital flows to emerging countries, allowing the real to stabilize at around R$3.20/US$. Despite the relatively stronger currency, the moderate growth of global commerce and commodity prices will allow generation of high trade surpluses and low current account deficits, fully financed by the capital inflows, so that the level of international reserves will remain stable.
The main risk comes from the reflections of the political crisis on execution of the fiscal adjustment. Besides the difficulties of meeting the primary deficit targets in 2017 and 2018, it will be hard for the current government to win approval of a pension reform that will allow the debt/GDP ratio to start falling in the not too distant future. Deterioration of the political crisis would raise the risks and reduce the conditions for stability of the real, worsening the outlook for inflation and monetary policy.
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