Over the long-term, Brazil will only experience modest levels of growth as structural headwinds limit any quick economic solutions to the challenges faced from falling global commodity prices. Growth will only return to the economy following a two consecutive years in recession in both 2015 and 2016.
The Banco Central do Brasil will back down from its promise to cut rates in 2016 and will instead hike the benchmark Selic rate by 150 basis points in 2016. Inflation has continued to accelerate despite the bank's attempts to stymie price increases through over 700 basis points of rate hikes in the past two years. Capital has continued to flow out of Brazil, putting depreciatory pressures on the real, feeding through to rising import costs.
The widespread public protests that took place in June 2013 marked a turning point for the Brazilian electorate. Public unrest will flare up intermittently until significant progress on promised reforms, including higher-quality public services and greater government transparency, begins to take shape. In line with this view, an ongoing corruption scandal at national oil company Petrobras will continue to drive public protests in the coming months.
Major Forecast Changes
We have downgraded our 2015 real GDP growth estimate to -3.1%, from -2.7% previously. Significant labour market deterioration helps to underpin this forecast change, as private consumption will be more subdued than we previously anticipated.
We now expect Brazil recession to deepen in 2016, revising our real GDP contraction in 2016 to be 3.4%.
We have revised up out benchmark Selic rate forecast for 2016. We now expect the Banco Central do Brasil to hike rates to 15.75% from 14.25%. This is a revision from our previous expectation for the bank to begin a rate cutting cycle in 2016 to spur growth.
|e/f= BMI estimate/forecast; Source: National Sources, BMI|
|Real GDP growth, % y-o-y||0.1||-3.1||-3.4||1.5|
|Nominal GDP, USDbn||2,345.5||1,748.6||1,330.8||1,466.0|
|Consumer price inflation, % y-o-y, eop||6.4||9.1||8.0||5.2|
|Exchange rate BRL/USD, eop||2.66||3.96||4.40||4.05|
|Budget balance, % of GDP||-6.2||-8.4||-8.7||-7.3|
|Current account balance, % of GDP||-4.4||-4.3||-6.2||-5.5|
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