Brazilian economy to continue to shrink in 2016, inflation unlikely to reach target rate in 2016, 2017

Last year, the Brazilian economy contracted significantly, and is expected to remain on that trend in 2016 as well. The second quarter GDP growth came in at -0.6 percent in sequential terms, whereas the economy shrank 3.8 percent in annual terms. In the previous quarter, the economy had contracted 0.4 percent sequentially and 5.4 percent in year-on-year terms.

Decline in prices of commodities mainly led to the deep recession, bringing a combination of huge declines in the country’s terms of trade and high inflation. For the whole of this year, Brazil’s real GDP is expected to shrink around 3.5 percent, said Commerzbank in a research note. But the latest data indicate that the worst is over and that the economy might grow 0.8 percent in 2017.

On inflation front, inflation in Brazil accelerated sharply last year along with depreciation of the real. The CPI levels had reached a high of around 10.7 percent year-on-year by early 2016. This is quite higher than the central bank’s 4.5 percent inflation target. However, inflation figures have dropped noticeably since then. But it continues to be higher at 8.97 percent in August, which is a bit higher than July’s print of 8.74 percent year-on-year.

The Brazilian central bank projects the appreciation of Brazilian real since the beginning of 2016 and higher jobless rate to curb inflationary pressures. But, BCB is unlikely to attain the inflation target rate of 4.5 percent in both 2016 as well as in 2017, added Commerzbank.

Brazil is being greatly affected by lower commodities prices. The terms of trade worsened significantly. If China, which is the largest commodity buyer globally, continues to remain weak, Brazil might continue to face challenges from this side.

The deceleration in the economy led to a 2015 budget deficit of 10.3 percent of GDP in 2015. The deficit is likely to come in close to 9 percent of GDP in 2016. However, this depends upon the government executing austerity programme, stated Commerzbank.