According to analysts from Wells Fargo, economic growth in Brazil will remain elusive if economic growth depends on the stance of the global economy and/or expansionary monetary and fiscal policy, even if there is some improvement in the current political environment.
Key Quotes:
“Perhaps one of the most difficult issues for Brazil today is how to reduce the fiscal deficit under this highly unworkable political environment.”
“Brazil’s domestic economy is in shambles, but is the global economy coming to the rescue? Do not count on it. It is true that the depreciation of the Brazilian currency has given some competitive edge back to Brazilian producers. However, for the global economy to make a difference, it has to be in a much better shape than it is today.”
“There are some potential positive developments that will probably help, on the margin, the Brazilian economy during this year and next. However, we are still forecasting a steep recession this year and a very weak recovery afterwards.”
“One of these potential “green shoots” is the improving situation in Argentina, one of Brazil’s largest export markets. Our expectation is for Argentina to start performing better this year and improve further next year.”
“Furthermore, while the global economy is not booming, it is also not contracting and Brazil continues to sell commodities to Asia and the Eurozone. However, the prices Brazil is getting for these exports are much lower than they were a few years ago, so the Brazilian government cannot count on these revenues to jumpstart economic activity through expansive fiscal policies. Meanwhile, monetary policy has become extremely contractionary as the Brazilian central bank continues to fight inflation and inflationary expectations.”
“Thus, both fiscal and monetary policies have become extremely contractionary and this has been reflected in economic activity after almost a decade of extremely lax monetary and fiscal policies. Furthermore, it is very difficult to envision changes to this policy environment in the next several years. This means that economic growth in Brazil will remain elusive if this economic growth depends on the stance of the global economy and/or expansionary monetary and fiscal policy, even if there is some improvement in the current political environment.”
(Market News Provided by FXstreet)
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