FGV researchers assess Brazil’s economic outlook amidst political uncertainty
19 June 2017

FGV researchers assess Brazil’s economic outlook amidst political uncertainty

FGV researchers discussed Brazil’s economy amidst an uncertain scenario, prompted by the political crisis outbreak in the last month.

FGV’s Brazilian Institute of Economics (IBRE) held the second 2017 Economic Outlook Seminar on June 12. The event held at FGV’s Cultural Center brought together IBRE researchers to discuss Brazil’s economy amidst an uncertain scenario, prompted by the political crisis outbreak in the last month.

The coordinator of the Brazilian Institute of Economics Macro Bulletin and organizer of the seminar, Regis Bonelli, introduced the themes under debate by addressing the political environment. He pointed out that despite the strong reaction in the days following the worsening of the crisis, the markets have become more ‘well-behaved’ – a sign that the macro area is not adrift and that the economic reforms will be put to vote.

“GDP growth in the first quarter was very high (1%), which we have not seen in a long time, but this growth was restricted to a few industries, particularly agriculture. On the demand side, it was much more due to the external demand, as the domestic demand continued to fall. The backdrop for the near future is not entirely bleak. Inflation and the SELIC rate are falling. The external sector shows good performance. Unemployment is still high, but the salary mass shows a modest expansion. The main concern lies in the fiscal outlook and its related risks,” he said.

Next, José Julio Senna spoke about the monetary policy in the U.S. and Brazil. He noted that the world economy shows no exuberant behavior, but displays good signs of recovery. According to Senna, this new phase is characterized by the synchronicity of the growth rates of the U.S., Europe, and Japan, which is good for Brazil. The economist pointed out that the current political crisis has affected Brazil’s fiscal adjustment, besides the fact that approving reforms proposed by the economic team will be even harder. Senna also stated that lower inflation rates reflect not only of the efforts of the monetary policy team, but the current global economic scenario as well.

Aloisio Campelo talked about the qualitative indicators on business and consumer confidence. He pointed out that these indexes had been increasing moderately since the beginning of the year, but that the political crisis may affect this trend. Campelo explained that future expectations for both companies and consumers are much higher than the perception of the current situation.

The next topic discussed was inflation. Salomão Quadros showed the variation of the rate in the last year, which reached the lowest level in May, totaling 3.18%. He pointed out that besides food, consumer goods also contributed to the lower inflation, showing a more favorable behavior than expected. The economist also explained that the deployment the green flag feature in power bills may drive the IPCA to a negative rate by the end of the month. He expects the inflation rate to hover around 3.4% by the end of 2017.

Finally, Silvia Matos provided macroeconomic projections. She pointed out that expectations have been frustrated since March, without much clarity about the strength of the recovery of the Brazilian economy. According to her, the signs point to a negative GDP in the second quarter. The researcher also explained that the political crisis will affect long-term growth, with economic recovery showing more modest rates than previously expected. At the end of her presentation, the economist pointed out that the re-articulation of the political system will be critical to the approval of the Social Security reform, on which depends much of the country’s economic recovery.

After the lectures, the seminar opened the floor for comments. Manoel Pires pointed out that his prospect was that 2017 would be a year of transition for the economic stabilization and recovery, but that the political crisis may affect this projection. Samuel Pessôa talked about the poor fiscal conditions of the Brazilian economy and that it is necessary to continue the work done by the economic team, so as not to compromise the future.

The next IBRE Economic Outlook Seminar will be held on September 11.