MACRO REPORT: Brazil, mired in recession and uncertainty

Wednesday, March 15, 2017

Brazil's President Michel Temer, highly unpopular since replacing his ousted predecessor Dilma Rousseff last August, has based his administration on pulling the country out of its deepest recession on record, but wavering support in congress and a growing corruption scandal have hampered his reform agenda.

Temer – recently implicated in the landmark Lava Jato investigation into the biggest corruption scandal in the nation's history – has been accused by former executives from disgraced construction giant Odebrecht of requesting illegal financial support for the 2014 election campaign. Considering that his term runs out at end-2018, the president's defense team may opt to delay the investigation undertaken by Brazil's top electoral court in order to run out the clock and spare the country another impeachment process.  

Start your 15 day free trial now!


Already a subscriber? Please, login

The current administration has lost half a dozen cabinet members in its first six months in office – some of them resigning over corruption accusations – and Temer is now struggling to regain control of his government, as part of his own governing coalition pushes back in congress against the country's long-awaited and much-needed pension reform.

GDP growth

Driven down by a fall in commodity prices, corruption scandals and political turmoil, Brazil's economy contracted 3.6% last year, after shrinking 3.8% in 2015, according to statistics agency IBGE. The country had not suffered two straight contraction years sine 1930-31.  

The central bank's latest 2017 year-end GDP projection calls for a 0.49% expansion. For 2018, the forecast is 2.4% growth. Nomura recently revised its GDP predictions to 0.7% for this year and 2.0% for next year.





February CPI data from IBGE registered 12-month inflation of 4.76%, above the central bank's 4.5% target for 2017-18.

In the most recent central bank survey, analysts projected the CPI to end the year at 4.19%. For next year, economists have maintained their forecast of 4.50%. Full-year inflation for 2016 came in at 6.29%.

FX rate

Brazil's currency is trading at about 3.15 reais per US dollar. The latest projection for the local currency at end-2017 is 3.30 reais/US$. For year-end 2018, the forecast is 3.40 reais/US$.

Key rate

Brazil's monetary policy committee cut its Selic key interest rate at the end of February 75bp to 12.25% from 13.00%. For this year, the central bank expects the Selic to come in at 9.00%. The year-end forecast for 2018 fell to 8.75%.

At its first meeting of the year, the committee surprised the market by cutting the key rate more than expected, to 13% from 13.75%.


The jobless rate hit 12.6% in January, a record high for the data series that began in 2012.  

The average unemployment rate in 2016 was 11.5% (11.8mn people) compared to 8.5% (8.6mn people) the year before.

Balance of trade

Brazil posted record trade surplus of US$47.7bn in 2016. The balance is the highest since the beginning of the data series, which began in 1989.

Fiscal deficit

Brazil registered a record-high primary budget deficit of 155.8bn reais (US$49.1bn) in 2016, although it did stay within the government's target of 170.5bn reais. The overall fiscal deficit, including interest payments, was 562.8bn reais last year, equivalent to 8.93% of GDP.


Temer has become increasingly unpopular. Ibope's latest poll, which was conducted in December, showed that 72% of Brazilians do not trust the president, compared to 68% in October's poll. Another 23% said they trust Temer, compared to 26% two months prior, while 5% said they did not know how to respond, compared to 6% in the previous poll.