Brazil's Perilous Economic Situation in 2015

2014 was a tough year for Brazil politically and economically -- the country just managed to cross the finish line at the end of the year with positive growth. However, six months on Latin America’s largest economy appears to be stagnating. In March of this year, industrial production continued its downward spiral from the previous month and shortly thereafter in April manufacturing PMI followed suit plunging to a four-year low. To combat the effects of their floundering economy, Brazil’s government has focused on fiscal austerity and boosting business confidence. 

From the political end of the spectrum there has been much upheaval in response to the austerity actions. In early May the Câmara dos Deputados, Brazil’s lower house of congress, approved a bill to limit unemployment benefits and one week later on 13 May a bill to reduce retirement pensions was approved. Labor unions as well as the Workers’ Party, one of Brazil’s major leftist political parties, had been aggressively fighting the bills. Unexpectedly, shortly after the pension reform bill was passed, the bill was amended and approved for a raise of benefits to certain pensioners. Soon, both the bill and the amendment will be moved on to the Senate for final approval. If passed by the Senate it would be a significant blow to Brazil’s policy of fiscal tightening essentially canceling out much of the effort Brazil has put forth to curb their economic decline.

FocusEconomics panelists foresee Brazil’s economic outlook worsening for the rest of 2015 due to the probability of declining private consumption and record low business confidence levels as a result of the government’s austerity policies. In terms of economic growth, our panelists forecast a decline in GDP of 1.0% in 2015, down 0.1 percentage points from last month’s forecast. For 2016, our panelists forecast GDP growth at 1.1%.

An acceleration of inflation from 8.1% to 8.2% in April marked the highest level since December of 2003. The Central Bank decided on 29 April to raise the benchmark SELIC overnight interest rate by 50 basis points, from 12.75% to 13.23%. FocusEconomics panelists expect inflation in Brazil to end the year at a level of 8.1% and end 2016 at 5.6%.

Author: Angela Bouzanis, Senior Economist

Date: May 25, 2015