Brazil Analysts Forecast Recession Deepening in 2016

  • 'Every decision is suspended,' says former central bank pres.
  • Economists also reduce year-end Selic forecast to 13.25%

Brazil economists for the first time forecast the recession will deepen from 2015, which was already the sharpest contraction for Latin America’s largest economy in 25 years.

Economists lowered their 2016 GDP call to 3.88 percent from 3.8 percent previously, according to the weekly Focus survey conducted April 22. That’s worse than the 3.85 percent recession registered last year.

A swirling political crisis that’s come to the brink of toppling President Dilma Rousseff has weighed on business confidence and frozen investment. With consumers likewise rattled by rising joblessness and inflation at more than double the government’s target, families are strapped for cash and tightening their belts. That’s put growth forecasts onto a downward spiral, with this week’s outlook marking the fourteenth straight reduction.

The only silver lining for a worsening economic outlook is that inflation expectations are dropping, and economists now estimate consumer prices will rise 6.98 percent this year. That’s the first time forecasts have fallen below 7 percent since early January.

And with slower inflation, economists are also expecting cuts to the benchmark Selic rate: down to 13.25 percent by year-end from its current 14.25 percent level. The central bank for its part has said there is no space for accommodative monetary policy considering the existing inflation risks. Neither the market nor any of the 27 economists surveyed by Bloomberg expect the bank’s board to begin the easing cycle just yet at their policy meeting later this week.

Lower borrowing costs are only part of what’s needed to rekindle investment. Business confidence as measured by the National Industry Confederation is hovering near historic lows as Rousseff struggles to fend off impeachment that she says amounts to a coup. After she lost a crucial Lower House vote on April 17, the process is moving to the Senate.

In the meantime, the economic outlook continues to suffer. Some, including the International Monetary Fund, are already forecasting stagnation next year. Economists the central bank surveyed forecast 0.3 percent growth.

“Until she’s out of office, the economy is just waiting,” Gustavo Franco, a former central bank president and founder of Rio Bravo Investimentos, said in an interview in Washington last week. “Every activity, every decision is suspended. There is a very clear expectation that she will have to leave office for life to come back to normal.”

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