The Start of the Temer Government: Where Will Growth Come From?

BRAZIL ECONOMICS - Report 30 May 2016 by Affonso Pastore, Cristina Pinotti, Caio Carbone and Marcelo Gazzano

It’s too early for a more precise assessment, but at first glance the measures announced by the new administration are in the right direction. They start by addressing the origin of the rapid growth of the debt/GDP ratio, which is the increase of expenditures at a pace faster than economic growth, by limiting the rise of nominal expenditures to the previous year’s inflation rate. With expenses remaining constant in real terms, and without any increases in the tax burden, the pace of the decline of the primary deficits depends on real GDP growth, which is the only source of revenue growth. Although measures like this tend to restore confidence and promote conditions for a meaningful drop in the real interest rate, rapid recovery of economic activity should not be expected. The main reason is the behavior of household consumption, which accounts for about 60% of GDP. Besides the high unemployment rate, impeding growth of real wages, Brazilian households are extremely indebted, and need to deleverage.

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