OECD Sees Milder Recession in Brazil Than Previously Forecast

  • Improved 2017 outlook a reflection of lower borrowing costs
  • Investment to expand next year, helped by monetary easing

Brazil’s recession will be milder than originally forecast as lower borrowing costs stand to boost investment in Latin America’s largest economy, the OECD said in a report on Monday.

The Organisation for Economic Cooperation and Development now forecasts Brazil will stagnate in 2017 following a 3.4 percent contraction this year. The developed-nation club previously projected a contraction of 4.3 percent and of 1.7 percent, respectively. The OECD’s revised 2017 forecast remains well below that of economists surveyed by Brazil’s central bank, who estimate growth of 0.98 percent.

After taking the reins of the country in May, Brazil’s Michel Temer triggered a rebound of confidence with pledges to fix the country’s public finances. Improved sentiment and a slowdown in inflation made room for the central bank to ease borrowing costs. Still, disappointing data has prompted economists to repeatedly cut growth forecasts in recent weeks.

“Growth is projected to resume progressively during 2017 owing to improvements in confidence and investment,” according to the OECD report, released on Monday. “The pace of the recovery will be limited by high corporate sector debt and significant spare capacity in some sectors.”

Brazil’s central bank last month cut its benchmark interest rate by a quarter-point to 14 percent, its first reduction since 2012. Its next policy decision comes on Wednesday, with most analysts forecasting the benchmark Selic rate falling to 13.75 percent.

Investment in the second quarter recorded its first growth in nearly three years, a trend that will continue as the government’s commitment to contain spending will allow further monetary easing, according to the OECD report. The developed-nation group forecasts that investment in Brazil will rise 1.1 percent in 2017, after a decline of 8.6 percent this year and of 14 percent in 2015.

Brazil’s gross domestic product will resume expansion in 2018, rising 1.2 percent, according to the report. That is still less than half the median forecast from economists in the latest central bank survey.

Trump’s Impact

As for Latin America’s second-largest economy, the OECD lowered its forecast for growth after Donald Trump won the US presidential election. The group now forecasts 2.2 percent and 2.3 percent growth this year and next, respectively. That is down from 2.6 percent and 3 percent previously. Both forecasts remain higher than the median estimates from economists surveyed by Bloomberg.

“The expansion of the Mexican economy is projected to be affected by policy uncertainties in the United States,” the report said. “However, the economy will continue to be supported by a competitive exchange rate, solid credit expansion, and continuing improvements in the labour market aided by the government’s structural reforms and the low inflation environment.”

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