Brazil’s economy to contract again in 2016, rebounding growth conditions to show up in 2017

In 2015, the Brazilian economy shrank 3.8%. The nation’s economy continues to be in recession. Brazil’s industrial output fell 8% last year and is expected to shrink further this year, although at a slower rate, noted Scotiabank. In the last quarter of 2015, Brazil’s gross fixed investment dropped 18% y/y. Moreover, the employment conditions deteriorated leading to a decline in purchasing power of consumers. This is also a disturbing trend as this will be a drag on local consumption. In March, Brazilian jobless rate shot up to 11%.

“We project that the Brazilian economy will extend its recession and contract by 3.8% in 2016 and improving growth conditions will materialize in 2017”, said Scotiabank.

For Brazil, the main macroeconomic priority is to combat inflation. Rising inflationary pressures due to strengthening US dollar and administered-price adjustments led to double digit inflation rate for a brief period of time. The Central Bank of Brazil has raised its key Selic rate to 14.25%. Given that the Brazilian real is stabilizing and inflation decelerating, the Central Bank of Brazil is expected to keep the rate on hold in the following months, added Scotiabank.

Meanwhile, Brazil’s economic team is applying fiscal adjustment that is a solution to reverse a serious confidence crisis. In the last 12 months, the public sector fiscal deficit of Brazil reached 9.7% of the GDP. High debt servicing costs was responsible for most of the deficit. According to private analysts’ estimates, the primary fiscal balance might start to rebound modestly in 2016. Brazil’s current account deficit is expected to reach 1.2% of the GDP by the end of 2016, said Scotiabank.