Brazilian Economic Outlook
Fernando de Holanda Barbosa Filho November 1st 2016
2 Boletim Macro IBRE
Change in fiscal and monetary policy after 2009 led to reduction in credibility
Inflation will continue around 6%, above the 4.5% target (6.4%).
Fiscal policy must remain expansionist generating important risks ahead.
Nominal deficit increases to the 3.5%-4.0% interval(too optimistic: 6% in 2014; 10.4% in 2015 and 7.7% until August in 2016; Primary Deficits 0.6% in 2014 and 1.9% in 2015. Worse than expected)
Potential Output Growth was reduced due to productivity growth reduction.
In this scenario, the short run must present low GDP growth and high inflation.
Brazilian Foreign Debt Down Grade is on the short term horizon. (2015)
Despite low growth labor market will continue strong (until 2014).
2014 was an electoral year. Therefore, the fiscal “solution” could only occur only in 2015. (Something was tried in 2015 but effectively It was postponed to 2016…)
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Fiscal Dominance X Political Dominance? It seems to be political dominance. Inflation above its target: 7.5%. New Central Bank restoring credibility.
Fiscal Situation is extreme in 2016: nominal deficit 7.7% and primary deficit 2.7%. Recession prolonged and deep: 2016 growth -3.2%.
Good news: External adjustment made. Current account from -4.3% to -0.7% in 2016 (estimated)
Good news: End of the Impeachment process improved expectations. Will growth resume?
Political Instability?
Will Temer government approve the necessary fiscal measures? Weak labor market and credit constraints
Despite recovery of confidence economy still very slow. Growth possibilities in the short run
Good possibilities: huge unused capacity
4 Boletim Macro IBRE
Inflation and Monetary Policy
0 5 10 15 20 25 30 35 40 45
mar-99 mar-00 mar-01 mar-02 mar-03 mar-04 mar-05 mar-06 mar-07 mar-08 mar-09 mar-10 mar-11 mar-12 mar-13 mar-14 mar-15 mar-16
Inflation and Selic (12 months) - %
5 Economia Aplicada
Inflation (%)
Source: IBGE and FGV/IBRE.
Inflação 2009 2010 2011 2012 2013 2014 2015 2016*E
IPCA - IBGE (%) 4,3 5,9 6,5 5,8 5,9 6,4 10,7 7.1 IPCA - Livres (%) 4,3 7,1 6,9 6,6 7,3 6,7 8,5 IPCA - Serviços (%) 6,9 8,1 9,8 8,7 8,7 8,3 8,1 7.0 IPCA - Bens Ex. Alimentação (%) 2,9 3,5 3,5 1,8 5,2 4,3 6,2 IPCA - Alimentação Domiciliar (%) 0,9 10,7 5,4 10,0 7,6 7,1 12,9 12,4 IPCA - Administrados (%) 4,5 3,1 5,6 3,7 1,5 5,3 18,1 5.9 IPCA Ex Alimentação Domiciliar (%) 4,9 5,1 6,7 5,1 5,6 6,3 10,3 -Taxa Selic (final de período - %) 8,75 10,75 11,00 7,25 10,00 11,75 14,25 14,00
6 Economia Aplicada
Fiscal policy
Source: IBGE and FGV/IBRE.
3,19 3,24 3,69 3,74 3,15 3,24 3,33 1,94 2,62 2,94 2,18 1,72 -0,57 -1,88 -3 -2 -1 0 1 2 3 4 5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 “Fiscal Spending” “Anti-cyclical policy?” Fiscal adjustment Fiscal Surplus (% of GDP)
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Gross Debt (%GDP)
Source: IBGE and FGV/IBRE. 50 52 54 56 58 60 62 64 66 68 70
dez-06 dez-07 dez-08 dez-09 dez-10 dez-11 dez-12 dez-13 dez-14 dez-15
8 Economia Aplicada
CDS
9 Boletim Macro IBRE
-3.2% Growth in 2016 and 0.6% in 2017
-4 -2 0 2 4 6 8 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 E 20 17 E Brasil mundo 1,0 -3,8 -3,2 0,610 Boletim Macro IBRE
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External sector adjustment
FX depreciation and external sector adjustment
• Trade balance and current account under adjustment
• FX depreciation and increasing growth differential are the relevant drivers;
• Sadly, most of the latter comes from domestic recession;
Source: Central Bank of Brazil and IBRE/FGV
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External Sector Adjustment
Source: IBGE and FGV/IBRE.
2009 2010 2011 2012 2013 2014 2015 2016*
Trade Balance (US$ bi) 25,0 18,5 27,6 17,4 0,4 -6,6 17,7 51,0
Exports (US$ bi) 153,6 201,3 255,5 242,3 241,6 224,1 190,1 189,0
Imports (US$ bi) 128,7 182,8 227,9 224,9 241,2 230,7 172,4 138,0
Trade Flow (% PIB) 16,8 17,4 18,5 18,9 19,6 18,8 20,4 19,1
Déficit em serviços e rendas (US$ bi) -19,6 -30,2 -37,2 -40,2 -46,4 -48,1 -36,9 -62,4
Current Account (US$ bi) -26,3 -75,8 -77,0 -74,2 -74,8 -104,2 -58,9 -11,4
Current Account (% GDP) -1,6 -3,4 -2,9 -3,0 -3,0 -4,3 -3,3 -0,7
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Domestic front
Recovery in domestic confidence
81,2 79,9 60 70 80 90 100 110 120 Au g-08 Fe b-09 Au g-09 Fe b-10 Aug -10 Fe b-11 Aug -11 Fe b-12 Au g-12 Fe b-13 Au g-13 Fe b-14 Aug -14 Fe b-15 Aug -15 Fe b-16 Aug -16
Business Confidence Index Consumer Confi dence Index
14 Economia Aplicada
Domestic front
Recovery in business confidence: mismatch between expectations and current situation
60 70 80 90 100 110 120
Present Situation Index Expectations Index
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Domestic front
Recovery in consumer confidence: mismatch between expectations and current situation
60 70 80 90 100 110 120
Present Situation Index Expectations Index Source: FGV/IBRE.
16 Economia Aplicada 75 80 85 90 95 100 105 110 jan -04 ag o -0 4
mar-05 out-05 mai
-06 d ez -06 jul -07 fev-08 set-0 8 abr-09 nov-09 jun-10 jan -11 ag o -1 1
mar-12 out-12 mai
-13 d ez -13 jul -14 fev-15 set-1 5 abr-16
Industrial Production (SA)
Domestic front
Industrial production has bottomed-out.
Source: IBGE and FGV/IBRE.
• But our preliminary numbers for August suggest a huge
contraction (-4,7% YoY and -3,2% MoM)
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Credit constraints
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Labor Market weak
• Despite growth improvements, the labor market is set to weaken
in 2016 and 2017
10,6% 8,6% 9,8% 7,1% 6,8% 8,9% 12,2% 12,6% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 1719 Economia Aplicada
Labor Market weak
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2016/2017
Source: IBGE and FGV/IBRE.
Government Spending Ceiling law. It may allow the government to control increase in spending;
Historically government spending growth is around 6% per year in real terms. Government Spending Ceiling law will require extra reforms to be respected: pension and retirement reforms.
Compulsory spending reforms. Improve spending quality.
21 Boletim Macro IBRE
2016 GDP by Demand
2015 2016 2017 GDP -3.8% -3.2% 0.6% Household consumption -4.0% -4.1% -0.3% Government consumption -1.0% -1.1% -0.5% Investment -14.1% -8.5% 2.3% Exports 6.1% 8.6% 4.4% Imports -14.3% -10.3% 4.4%22 Boletim Macro IBRE
2016 GDP per sector
2015 2016E 2017E GDP -3.8% -3.2% 0.6% Agriculture 1.8% -1.0% 3.3% Industry -6.2% -3.3% 1.5% Services -2.7% -2.7% 0.2%23 Boletim Macro IBRE
Forecast output growth per quarter
(sem ajuste sazonal, AsA)
• Interannual growth rates are set to improve ahead – but
will remain negative throughout this year
-5,4% -3,8% -2,4% -1,1% -0,5% 0,0% 0,8% 1,8% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3%
2016.I 2016.II 2016.III 2016.IV 2017.I 2017.II 2017.III 2017.IV
24 Economia Aplicada
Domestic front
Bad equilibrium: high Inflation and interest rates
• Inflation will be above the upper bound of Central Bank´s target in
2016 – but likely below it in 2017
• Deceleration is happening mostly in regulated prices;
• Deceleration in services is very moderate;
Source: IBGE and IBRE/FGV 10.7% 7.5% 5.5% 7.5% 4.6% 2015 2016 2017
25 Economia Aplicada
GDP Forecast (2016 and 2017): Optimistic Scenario
• The first step is to restore fiscal solvency. If government's agenda
gets approved, then we can expect higher growth in 2017
-5,4% -3,8% -2,4% -1,1% -0,5% 0,0% 0,8% 1,8% -2,0% -0,5% 0,4% 1,4% 2,3% 2,7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4%
2016.I 2016.II 2016.III 2016.IV 2017.I 2017.II 2017.III 2017.IV
Base Projeção
Year Baseline Optimistic
2016 -3,2% -3,0%
2017 0,6% 1,7%
GDP (YoY)
26 Economia Aplicada
Short run growth possibilities
In recent years GDP growth was severely reduced while inflation continued at high levels.
A possible explanation is a low potential output growth.
Once again slower productivity growth is the main cause of its lower potential output growth.
Potential GDP growth is below 2% per year.
The Dilma government apparently had strong negative shocks on potential output growth. TFP was very negative the last two years.
Can we grow in the near future?
GDP Productivity Labor capital
2002-2008 4,3% 2,3% 1,9% 2,0%
2002-2010 3,6% 1,6% 1,8% 2,3%
2010-2015 2,3% -0,1% 1,0% 4,4%
Atual A 1,5% 0,0% 1,2% 2,0%
Atual B 2,2% 0,5% 1,2% 2,5%
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Short run growth possibilities
What´s the possible growth rate in the next years? 1 – Employment forecast
2017: 0,8% 2018: 1,1%
2 – Capacity Utilization Index (NUCI) is very low today: 73,9 (year average). Three possibilities:
No recover in the NUCI: 2017=73,9; 2018=75 Nuci partial recovery: 2017=75; 2018=78,1
Nuci total recovery(equal 2010) : 2017=78,1; 2018=83,4. 3 - Investment: 2017: 15%; 2018: 18%
28 Economia Aplicada
Short run growth possibilities
4 – 2010 recovery:
5 – Estimates:
GDP TFP Labor capital Nuci
2009-2010 7,5% 2,7% 2,0% 2,9% 5,6%
GDP TFP capital Nuci Labor
2017A 1,0% 0,0% 1,3% 0,0% 0,83% 2017B 1,6% 0,0% 1,3% 1,5% 0,83% 2017C 3,4% 0,0% 1,3% 6,0% 0,83% 2018A 2,1% 0,0% 2,2% 1,5% 1,10% 2018B 3,2% 0,0% 2,2% 4,1% 1,10% 2018C 4,3% 0,0% 2,4% 6,8% 1,10%
29 Economia Aplicada
Conclusion
Fiscal Situation requires immediate measures in order to recover debt sustainability.
Monetary policy authority is trying to regain credibility. Inflation is going down (but at a slower rhythm?).
External Adjustment “complete”.
Growth rate negative (Deep recession).
End of impeachment process triggered a recovery of confidence. However, economic activity still slow.
Weak labor market and credit constraints will make economy recovery difficult. Slower path.
However, there exist room for sharp recovery over the short run. Resources available to be used.
Fiscal path to stability may trigger recovery