Brazil economy has started a slow recovery, but still several structural and fiscal challenges remain. A gradual improvement is likely and Brazil could return to positive growth in 2017. GDP fell less than expected 0.3 percent q/q in Q1, after having fallen by 1.5 percent on average for four quarters in a row.
Dilma’s suspension has definitely reduced political uncertainty. Business confidence has also started to recover over the past three months, from a record low level as political uncertainty edges lower.
Commodity prices have started to recover and exports to China have recovered slightly. BRL has appreciated in recent months after a sharp depreciation last year on account of low commodity prices, downgrade of government debt, continued political uncertainty. Inflation is also abating and together with correction in unit labour costs is likely to edge further lower.
The signal rate (Selic) has been raised to 14.25 percent and tight monetary policy is likely to continue. Structural reforms (taxes, pensions, infrastructure, etc.) are slow or absent. Fiscal challenges remain with budget deficit is rising and is now estimated to around 10 percent of GDP.
Positive effects from the weakening of the real along with higher commodity prices, lower inflation and less political uncertainty could see some turnaround.
"We expect GDP to drop 3½ percent this year, but grow 0.5% in 2017, said DNB Markets in a report.
