What is brazil gdp

Brazil’s GDP outlook for 2015 gets slashed again. But is it low enough?

Market forecasts for Brazil’s economic growth this year have been falling steadily for months, reaching a meager 0.5 percent in Reuters latest quarterly poll published on Thursday. One year ago, a similar survey predicted growth of 2.5 percent in 2015.

Everyone, from government officials to foreign investors, is bracing to a tough year of austerity and adjustments ahead.

The problem is, reality may turn out to be even worse. Potential shocks to Brazil’s economy have been very hard to predict, let alone calculate, and most of the expected expansion is based on a recovery of private investment that looks far from certain.

First and foremost, the government itself risks choking the economy with a string of tax hikes, budget cuts and interest rate increases. After years of perceived tolerance with high inflation and rising public spending, Brazilian authorities took ratings agencies seriously and decided to tighten the belt before the country lost its coveted investment-grade status.

Most economists have applauded the increased signs of fiscal discipline; they even say that the massive effort to boost public savings this year, equivalent to 1.2 percent of GDP, is just the first step on a long road to stabilize public debt.

But others have warned that tightening both fiscal and monetary policies so aggressively at the same time will definitely weigh on growth – which also matters for debt management at the end of the day.

“The contractionary impact of these measures is likely to exacerbate the slowdown in the economy and is behind our house call for economic recession in 2015,” HSBC economists wrote in a note. Although they had the lowest forecast for Brazil’s 2015 growth in the poll, -0.5 percent, they warned that their estimate is more likely to drop further than to improve.

The other two potential sources of trouble are much harder

to predict as they don’t fit in fancy econometric models.

The first is the wide corruption scandal involving oil giant Petrobras and the country’s largest engineering and construction firms. One of them, OAS, already defaulted on its debt; others may follow suit. according to Fitch, potentially paralyzing infrastructure projects worth billions of dollars all around the country.

The second risk is weather. Insufficient rain for another year in most of center and southwest Brazil has raised concerns over a potential energy rationing and, most likely and worrying, water scarcity in the Sao Paulo megalopolis. State-run water utility Sabesp has not announced a feasible Plan B for the dozens of millions of consumers based in Sao Paulo in case it doesn’t rain enough; there will probably more questions than answers until March, when the rainy season is supposed to end.

So where are economists placing their bets on? Trade and private investment. A weaker exchange rate will probably reduce imports, boosting local industries, while the market-friendly policies adopted by the new economic team would encourage companies to unfreeze investment plans.

The first leg of this reasoning sounds feasible, but the second may be just wishful thinking: if anything, because investment makes up to less than a fifth of Brazil’s economy, so it would need to grow substantially to offset lower government spending and weak household consumption.  It also may take longer to materialize as business expectations would only slowly impact capital spending plans: good news on that front may come just in 2016.

Better late than never, some could say – as long as Brazil’s new economic policy survives a tough 2015.

“Though we are, of course, still quite concerned about growth and we continue to forecast a recession for 2015 (-0.3%), we are more hopeful about a change to the policy mix and its implications for Brazil down the road,” Morgan Stanley economist Arthur Carvalho wrote in a note.

Source: blogs.reuters.com

Category: Bank

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