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IMF: Downgrade Forecast for Brazil’s GDP in 2019

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Fund has estimated an expansion of 2.1% this year; growth is expected to be 3.3%. Crisis in Venezuela should shrink GDP by 25%

The International Monetary Fund (IMF) reduced its forecast for the Brazilian economy in 2019 by 0.4 percentage points. The agency has estimated a 2.1% expansion for the country this year in the World Economic Outlook report this Tuesday (9).

In January, the IMF predicted that Brazil’s gross domestic product (GDP) would grow 2.5% this year – a slight improvement over last October’s projection of a 2.4% expansion in the economy in 2019 .

In the study, the Fund cites Brazil among the examples of Latin American nations that are in a recovery cycle after emerging from a 1.1% growth in 2018. The latest IMF estimate for Brazilian growth in 2018 was 1.3%.

The projections of the agency for the Brazilian GDP in 2020, however, go the opposite way, as shown in the chart below: The IMF estimates that Brazil’s economy will advance 2.5% – an improvement of 0.3 percentage points in relation to the projection made in January, but a drop of 0.1 in relation to the projection made in October.

Tax Scenario

The report points out that spreads (the difference between what is spent and received in interest) have fallen since October in Brazil, amid optimism with the Social Security reform in the new government. However, the study points out that, particularly in the country, fiscal imbalances have weighed heavily on the projection.

“In Brazil, the main priority is to contain the increase in public debt while keeping social spending intact. The spending ceiling introduced in 2016, which increases the primary result by 0.5 percentage point per year, is a step in the right direction for facilitate fiscal consolidation, “the IMF said.

“With inflation still close to the target, monetary policy can be accommodating to support demand,” the agency says. “The recent labor reform and credit subsidies are efforts to improve the infrastructure and efficiency of financial intermediation,” the IMF adds, “and can help increase productivity and raise growth prospects in the medium term.”

Emerging, Latin America and the Venezuelan tragedy

Expansion projected for Brazil in 2019 is less than half expected for emerging countries, at 4.4%. The expansion is expected to be pulled by China and India, which are expected to grow by 6.3% and 7.3%, respectively. By 2020 the estimate is 2020 for this group of countries.

While China and India pull up the growth of emerging countries, Venezuela has a strong negative impact on growth in Latin America: the IMF projects a 1.4% expansion for the region, strongly influenced, negatively, by the expected contraction of 25% in the economy of the country in crisis. In 2018, the Venezuelan GDP fell 18%; for 2020, expectation is of contraction of another 10%.

Argentina should also have a recession this year, with an expected 1.2% drop in GDP.

Global economy

The agency also reduced its growth forecast for the world economy in 2019 to 3.3% (a fall of 0.2 percentage point from the January estimate). With this, it foresees an even deceleration against the advance of 3.6% in 2018.

The Fund also attributes weakness to a precarious recovery in emerging markets and developing economies, driven in large part by economies with serious macroeconomic problems, and complex factors that shape the prospects for growth in these groups.

By 2020, the Fund maintained the largest expansion estimate for the world economy of 3.6%.

Effects of Brumadinho

The IMF report also mentions rising metal prices, citing the disaster with the Brumadinho Dam among the main causes. The agency highlights the price rise between August last year and February this year, after a period of “notable” slowdown caused by the weakening Chinese economy.

“However, metal prices have since reverted, driven by expectations of more fiscal stimulus in China and improving the mood of global markets – coupled with a strong increase in iron ore due to the Brumadinho disaster in Brazil.”