Very weak economic activity at the start of 2019

BRAZIL ECONOMICS - Report 18 Mar 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

After growing only 0.1% in the fourth quarter of 2018, or 1.1% in the year average (the same as in 2017), the economy has still not shown any signs of improvement this year. None of the numbers disclosed up through last week (industrial production, real retail sales and real revenues from services) suggest any acceleration, which jeopardizes the projection for 2% growth in 2019. The pace of any cyclical recovery depends on the intensity of expansion of aggregate demand, and in light of the contractionary effect of fiscal policy it is inevitable for suggestions to arise that the Central Bank should recommence easing the interest rate. With the one-year ex-ante real interest rate at around 2.5%, significantly below estimates of the neutral real interest rate, a good dose of monetary stimulus is already being administered to the patient, and any additional stimulus requires perfectly satisfying the restrictions imposed by fiscal policy. This will start with approval of a robust pension reform, which is forecast to happen sometime in the second half of the year.

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