Interview with Chief Economist of Banco Fator: “2017 will be a difficult year for Brazil”
The Brazilian economy remains stuck in the worst recession in modern history and GDP is expected to contract a sharp 3.2% in 2016. While signs of stabilization have begun to emerge and the recession is abating, the FocusEconomics panel sees only a tepid recovery next year, with growth of 1.0%. Against this backdrop, we spoke with one of our panel members Chief Economist José Francisco from Banco Fator about the recent developments in the Brazilian economy and what he expects for 2017.
José Francisco de Lima Gonçalves won the Chief Economist of the Year from the National Council of Economics in 2014 and has held distinguished roles in the Brazilian government. He holds a Ph.D in Economics from Universidade Estadual de Campinas and has been Banco Fator’s Chief Economist since 1997. In 2016 he won the #2 Brazil Best Forecaster Award from FocusEconomics.
FocusEconomics: How has the political and economic environment changed over the last few months and what is your outlook for 2017?
José Francisco Gonçalves: In mid-2016, I was amongst the consensus economists. We were expecting the economy to stabilize sometime between the third and the fourth quarters and to resume growth by the second quarter of 2017. But we were surprised by the feeble activity during the third quarter, which was broad-based. Also, though this was less of a surprise, tax income continued to fall and spending to rise, on the back of increases in unemployment. Confidence indicators also worsened after having improved somewhat. Looking ahead, 2017 will be a difficult year. Domestic political and ethical crises will not end anytime soon and are clearly constraining the economy. And this is before we add Trump into the mix…
FE: Our panel of 38 economists forecast that the Brazilian economy will expand 1.0% next year. Are your forecasts in line with the consensus?
JFG: We have recently cut our forecast for GDP growth in 2017 from 1.2% to zero growth. In fact, recent developments in both the political and economic environment (see above) have made us relatively more downbeat. The labor market will still worsen, credit may stabilize but will not increase, and net exports will contribute with a very small push. The only good news, although due to high unemployment, is that inflation is headed down. And this creates ample space for the Central Bank to strongly reduce the interest rate.
FE: After Dilma’s impeachment, will Brazil continue to make improvements in reducing its culture of systemic corruption?
JFG: Recent developments confirm the favorable trend. Operation Lava Jato is being continued with clear support from the populace and the media. There are ups and downs in its management, but I think institutions are solid and able to deal with Brazil’s problems.
FE: Will Eduardo Cunha’s arrest undermine Michel Temer’s support in Congress?
JFG: Temer’s support rests largely on the Brazilian Democratic Movement Party (PMDB), a party that is a federation of local and regional interests. They have been present at all levels of public administration and Congress since the redemocratization of the mid-80s. Cunha is not the only, nor the most relevant, supporter of Temer in trouble. There’s a clear downside risk for the government and the economy here.
FE: Could you comment on the other Temer supporters in trouble? Who do you think is most relevant and what events are you watching for political stability? Do you think there is a chance of early elections?
JFG: Early elections are possible, but not our basic scenario. We are facing a complex process that nobody is in control of, but I don’t see how such elections would favor any of the key figures in politics at the moment. We monitor, as far as possible, events regarding Lava Jato and bills being voted in the Congress. There’s a relationship between the ongoing investigation, lawmakers’ trials to defend themselves and parliamentary activity. MPs are often caught between a rock and a hard place when seeking to approve bills of government interest.
FE: Do you think the Brazilian government or Senate will pass the spending cap by year-end? Do you see any potential holdups or negative consequences from the bill?
JFG: I expect the Senate to approve the bill by year-end, but it will not be the solution that some people expect. It is obvious that something needs to be done, and capping any increase in spending below GDP growth could be an alternative. On the other hand, however, I agree with the view that there is a risk of entering a vicious spiral if expense cuts lead to less activity and then lower tax collection, etc. So it will be crucial for the infrastructure investment program to take off and boost the economy, but this requires adequate regulation and funding. It’s not reasonable to wait for a package of infrastructure investment with the real ex-ante Selic at 8%.
Click on the image to open a full-size version
FE: Otaviano Canuto, Executive Director at the World Bank, has recently stated that “Brazil has been suffering from anemic productivity growth.” Do you agree with this statement and if so, what actions can be undertaken to sustain productivity increases in the long run?
JFG: Productivity depends on some long-term factors such as education. But this is not a panacea. Improving education patterns is almost useless if there’s no investment to incorporate new technologies into the productive process. So, access to state-of-the-art technology, as well as financing and other competitiveness determinants (exchange rate, scale), must be established in order to recover productivity.
General production conditions also need to be improved. Efficient infrastructure logistics and safe energy supply are required to create an adequate environment for investment decision making, as well as a stable macroeconomic environment.
On the other hand, there’s plenty of room for more productivity gains resulting from microeconomic and fiscal reforms (e.g. reforming the tax system and reducing public expenses). Regulatory issues are also critical. A look at the World Bank’s Doing Business in Brazil report clearly points to the long road ahead.
FE: Do you see the government being able to pass a pension reform next year? What elements would you like to see in the bill?
JFG: I think a pension reform in some shape or form will be approved by mid-2017, since capping public spending would be useless without including social security in the areas to be cut. Indeed, the main problem is not spending on personnel or suppliers, or even transfer payments. A pension system that adjusts both to our demographic needs and to cyclical swings is much needed. The first issues to resolve are the minimum age to retire and the indexation that should be used to update retirement benefits. This should allow credible projections of the social security accounts to be produced.
FE: How do you see the SELIC rate moving over the next year and at what pace do you expect the Central Bank to ease? Has the recent market and exchange rate volatility affected your forecast?
JFG: We revised our expected Selic trend after the last COPOM decision a month ago. Then, against our expectations, the committee reduced the policy rate by 0.25%, on the back of external uncertainty, slow fiscal progress and a lower-than-expected decline in services prices. They should maintain the pace of easing next week, thus we postponed the increase in the pace of reduction of the Selic to January’s meeting. Recent developments don’t look likely to change our outlook, for we had already anticipated an exchange rate of R$ 3,20 (November FocusEconomics Consensus) and of a revised R$ 3,38 (current).
However, we still understand that the rate will fall faster due to an increase in the nominal deficit and that there is a growing risk of the economy stabilizing without signs of recovery. We expect the rate to reach 9.75% by October.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Date: December 1, 2016
TagsIMF MENA precious metals European Union Italy Forex Commodities India Australia Argentina Company News oil prices UK Canada Russia Consensus Forecast Nordic Economies Cryptocurrency Ukraine France Trade Japan United States Economic Growth (GDP) Brexit Precious Metals Commodities Venezuela China OPEC Tunisia Portugal Eastern Europe Infographic Exchange Rate Investment Sub-Saharan Africa Vietnam Gold Iran Asia Mexico Bitcoin Inflation Greece Spain Euro Area USA Germany Major Economies Healthcare Africa Brazil Unemployment rate Latin America Agricultural Commodities Colombia Base Metals Commodities United Kingdom G7 Energy Commodities Emerging Markets South Africa Housing Market Banking Sector Turkey Oil TPP
Angola expected to grow 1.6% in 2018 and 2.7% in 2019. Read more: https://t.co/E1QrCcf8pe
9 hours ago
Economic reforms and the OPEC oil output cut deal will constrain economic activity in Angola this year: https://t.co/E1QrCcf8pe
9 hours ago
Everyone is talking about steel tariffs at the moment. We summarise the situation between the U.S. and China in thi… https://t.co/3gucWx5pmK
9 hours ago
9 hours ago
Korea projected to grow 3.0% in 2018, up 0.1 percentage points from last month. Read more: https://t.co/ctGLsBQvu9
9 hours ago
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- How Student Loan Debt Affects the Economy
- Elections in Russia: Analysis and Implications
- 2018 & 2019 Economic Outlook for the Top Oil Producing Countries
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Gold: The Most Precious of Metals (Part 3)
- Venezuela's Electoral Conundrum
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- China’s growing influence on the Latin American economy
- Top Economics & Finance Blogs of 2018
- How Latin America emerged from recession in 2017
- Is this the beginning of the end for Bitcoin?
- Risks and Opportunities for 2018 - Daniel Lacalle
- Emerging Markets 2018 Economic Outlook
- The role of FDI in Vietnam’s socio-economic development
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit