Brazil GDP May 2016


Temer takes the reins of Brazil's sinking economy

After over 20 hours of deliberations, Brazil’s Senate voted to move ahead with a trial against President Dilma Rousseff on 12 May in the ongoing political drama that has gripped Brazil for the past months. The decision brings Rousseff one step closer to being formally impeached and she was forced to step down while the trial takes place. Rousseff is being investigated for breaking strict budget rules and is widely unpopular due to Brazil’s deep recession and a large corruption scandal. On the same day, Vice President Michel Temer, from the Brazilian Democratic Movement Party (PMDB), took over as interim President and appointed a new cabinet. The first task of the interim government will be to try and halt the sinking ship that is Brazil’s economy. However, a leadership change is not a magic bullet and a number of daunting challenges lie in the path of a recovery.

The biggest obstacle for the new government will be trying to push through fiscal consolidation measures and structural reforms amid the country’s worst recession in recent history. Fiscal consolidation is desperately needed to stabilize the government’s finances and boost confidence in the country, but any cuts to social spending will be deeply unpopular among Brazilians. Faced with this tough task is newly-appointed Finance Minister Henrique Meirelles, the former Central Bank governor. Meirelles is expected to introduce orthodox economic policies. In Temer’s first speech, he highlighted that the government would focus on implementing economic reforms, specifically labor and social security reform, however, it is unknown if he has the backing needed to pass legislation through Brazil’s fragmented Congress. Commenting on the new government, Cassiana Fernandez, Brazil Chief Economist at JPMorgan states:

“In our view, if a successful market-friendly agenda is implemented, especially with fiscal reforms that aim to improve the debt dynamics, it could boost the current low levels of confidence seen across the economic sectors. However, at this juncture, we remain skeptical since the measures needed to stabilize the economy will likely be difficult to implement and may not automatically produce results.”

At this point, it appears unlikely that the new government will be able to quickly turn Brazil’s economy around. Households have been hard hit by high inflation and unemployment and confidence levels remain at historical lows. Moreover, a large portion of government spending is mandated by the constitution, which limits the government’s ability to reduce expenses and it is possible that Temer’s government will end up suffering from the same setbacks as Rousseff’s—chiefly a lack of support in Congress and low approval ratings. A number of high-profile PMDB members are implicated in the ongoing Petrobras corruption scandal and polls suggest that Temer faces approval ratings similar to those of Rousseff.

Against this backdrop, our panel of analysts sees another deep contraction this year as political developments continue to take center stage. LatinFocus Consensus Forecast panelists expect the economy to contract 3.7% in 2016, which is down 0.2 percentage points from last month’s estimate. For 2017, the panel sees the economy growing 0.8%.

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