Recession coming to an end but slow growth ahead
After a deep and prolonged recession, Brazil is beginning to show signs of recovery. The March Purchasing Managers’ Index (PMI) figures, while still reflecting economic contraction, reached their highest since February 2015, while industrial production data also indicated a less severe recession. In addition, the monthly index of economic activity in January and February 2017 showed strong expansion. This trend is expected to continue through the first quarter and would end 11 consecutive quarterly declines. IHS Markit forecasts that Brazil’s economy will likely stabilize in 2017 and resume growth in 2018.
While PMI indicators have improved in recent months, Brazil’s government must still pass politically unpopular reforms to fix its huge fiscal gap: Gross fiscal debt amounts to 70% of GDP, which borders on unmanageable levels. On the positive side, lower inflation—due to reduced demand during the recession—will allow Brazil’s central bank to continue to cut the policy rate. Moreover, Brazil’s exchange rate remains relatively strong, supported by a sizeable trade surplus and capital inflows. Brazil already has a highly diversified industrial base, abundant natural resources and great domestic market potential; if it can balance its public finances, it would significantly increase its long-term appeal to foreign investors.