Brazil OECD Econ Outlook

8/2/2019 Brazil OECD Econ Outlook

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3. DEVELOPMENTS IN SELECTED NON-MEMBER ECONOMIES

OECD ECONOMIC OUTLOOK, VOLUME 2011/2 OECD 2011192

BRAZIL

Tighter economic policy and weaker external demand have helped to cool the economy from the

rapid growth rates seen in 2010, but inflationary pressures have not receded and credit growth is still

buoyant. Activity is expected to grow at below-trend rates over the next two years, notwithstandingsupport from large infrastructure programmes. Inflation may fall to about the middle of the central

banks target band.

Domestic demand remainsstrong

The Brazilian economy has slowed, reflecting the withdrawal of some

policy stimulus and a substantially less buoyant international

environment. Domestic demand continues to be the main engine of

growth, outstripping supply and resulting in robust import growth. Private

consumption has been supported by credit expansion and increasing

labour incomes. Investment has gathered pace but has been growing at a

much slower rate than in most of 2010. By contrast, exports have been

damped by past currency appreciation and recent weakness in exportmarkets.

The real has been volatile Recent turmoil in financial markets has increased volatility of

exchange-rate movements. Markets may also have reacted to an

unexpected easing in the monetary stance. The monetary authorities

have intervened to prevent disorderly movements in the currency.

Inflation rose through 2011but is set to fall through

to 2013

Inflation picked up to 6 per cent in 2011, with year-on-year inflation

exceeding the ceiling of the official target range since June 2011, and

inflation expectations have been on the rise. Weaker growth of economic

activity will probably put downward pressure on prices although

unemployment is low and average earnings have accelerated. The net

Brazil

1. Includes stockbuilding and statistical discrepancy.

2. The financial account balance includes net direct investment, net portfolio investments, net derivatives and other investments.

Source: Central Bank of Brazil, IBGE and OECD Economic Outlook 90 database.

1 2 http://dx.doi.org/10.1787/888932541436

2007 2008 2009 2010-4

-2

0

2

4

%

Domestic demand

Net exports

GDP

Domestic demand remains the main driver of growthContribution to annualised growth rate, seasonally adjusted

2008 2009 2010 2011-10

-5

0

5

10

15

20

$bn

100

110

120

130

140

150

160

Index2005 = 100

Real effective exchange rate

Financial account balance

The real has been volatile


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OECD ECONOMIC OUTLOOK, VOLUME 2011/2 OECD 2011 193

effect is likely to be a fall in inflation to about the middle of the target

range by 2013.

Monetary policy has eased After having tightened the monetary stance earlier in the year, the

Central Bank has cut the policy rate by a full percentage point to 11.5%

since September 2011 and loosened restrictions on consumer lending in a

context of increasing uncertainty regarding the global outlook. Assuming

inflationary pressures clearly recede, there is room to lower interest rates

further if the international environment continues to deteriorate.

Fiscal restraint hascontinued

The fiscal support introduced during the 2008-09 crisis is being

gradually reversed, and the authorities have announced new spending

cuts relative to the 2011 federal budget. In addition, the government

tightened the primary deficit target for 2011. On the current growth

1 2 http://dx.doi.org/10.1787/888932542937

Brazil: Macroeconomic indicators

2009 2010 2011 2012 2013

Real GDP growth -0.7 7.5 3.4 3.2 3.9

Inflation (CPI)1 4.3 5.9 6.5 5.8 4.7

Fiscal balance (per cent of GDP)2 -3.3 -2.5 -2.7 -2.8 -2.6Primary fiscal balance (per cent of GDP)2 2.0 2.8 2.9 2.5 2.5

Current account balance (per cent of GDP) -1.4 -2.3 -2.0 -2.2 -2.5

Note: Real GDP growth and inflation are defined in percentage change from the previous period.

1. End-year.

2. Takes into account a capital injection (0.5% of GDP) in the Brazilian Sovereign Wealth Fund in 2008, which

was treated as expenditure, and excludes Petrobras from the government accounts.

Source: OECD Economic Outlook 90 database.

Brazil

1. Cumulated 12-month flows.

2. Year-on-year growth.

3. 12-months ahead.

Source: Central Bank of Brazil, IBGE, National Treasury.

1 2 http://dx.doi.org/10.1787/888932541455

2007 2008 2009 2010 201115

16

17

18

19

% of GDP

0

1

2

3

4

% of GDP

Spending

Primary balance

Public spending is fallingCentral government

2007 2008 2009 2010 20110

2

4

6

8

10

%

8

10

12

14

16

18

20

%

Tolerance band

Consumer prices (IPCA)

Short-term interest rate (SELIC)

Expected inflation

Inflation expectations have moved up


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OECD ECONOMIC OUTLOOK, VOLUME 2011/2 OECD 2011194

projection, the fiscal targets are expected to be achieved, despite the largeminimum wage increase planned for 2012 and its ripple effect on pension

benefits. Priority should, however, continue to be given to fiscal

consolidation. In addition to putting the general government accounts

onto a sustainable footing, a tighter fiscal stance would ease upward

pressure on inflation and the exchange rate and make room for lower

interest rates. Given the countrys needs in the short and medium term,

infrastructure and social spending should continue to be protected from

budget cuts. To more effectively achieve fiscal restraint, widespread

revenue earmarking should be cut back and an expenditure ceiling

introduced.

Structural reforms areneeded to reduce Brazils

cost disadvantage

The Greater Brazil Plan (Plano Brasil Maior) features a package of

measures amounting to a total of some BRL 21 billion (0.6% of GDP) to

boost competitiveness of domestic firms in key tradable sectors. Although

some measures of the plan may provide short-term relief, they will not be

sufficient to reduce the cost disadvantage of producing in Brazil, and

further reforms to the tax system and to foster investment in

infrastructure are urgently needed.

Activity is expected to growat below potential rates

Domestic demand is expected to continue to sustain economic

growth. A recovery in investment should be supported by large

infrastructure programmes. However, with exports held back by weaknessabroad, GDP is projected to expand at sub-potential rates and the current-

account deficit to deteriorate. Inflation may gradually diminish but

remain in the upper part of the target range.

The risks are mostly on thedownside

The main downside risk is a continued worsening of the

international environment and a consequent shift in sentiment, which

could reverse capital inflows and cut growth in the short term. On the

positive side, spending on infrastructure could be faster than envisaged.

1 2 http://dx.doi.org/10.1787/888932542956

Brazil: External indicators

2009 2010 2011 2012 2013

$ billion

Goods and services exports 178.2 233.3 297.2 330 371Goods and services imports 179.8 254.0 316.9 357 412Foreign balance - 1.6 - 20.7 - 19.7 - 27 - 41

Invisibles, net - 22.7 - 26.6 - 29.1 - 29 - 30

Current account balance - 24.3 - 47.4 - 48.7 - 56 - 70

Percentage changes

Goods and services export volumes - 10.2 11.5 4.3 8.2 10.2

Goods and services import volumes - 11.6 36.2 12.6 13.8 13.0

Terms of trade - 3.4 12.7 10.3 3.5 0.1

Source: OECD Economic Outlook 90 database.


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OECD ECONOMIC OUTLOOK, VOLUME 2011/2 OECD 2011 195

Policy orientation shoulddownside risks materialise

If the downside risks materialised, the OECD has identified, as part of

its Strategic Response, key macroeconomic policies, as well as structural

reforms which, while desirable in any case, would become essential to

raise growth.

Brazil should first ease monetary policy to support the economy andhas ample room to do so, but it has scope for discretionary fiscal

stimulus if needed, in addition to allowing the automatic stabilisers to

work. Any such fiscal action should, however, be couched in terms of a

medium-term framework, which sets out a path for fiscal consolidation

over time that would be needed to ensure long-term sustainability of

the public finances, including social security. In general a policy mix

that would combine a more restrictive fiscal policy with interest-rate

cuts would ease upward pressure on the real and help to achieve the

medium-term objective of reducing extremely high interest rates.

The authorities should continue their efforts to secure support from

state governments to simplify the tax system with a view to loweringfirms compliance costs and boosting incentives to invest. The most

beneficial change would be to introduce some payroll tax relief and

harmonise state value-added taxes.

Instead of the new industrial policy (see above) the authorities should

focus on measures that can durably lower Brazils high production costs

such as simplifying the tax system or developing infrastructure to lower

transport costs.

Brazil OECD Econ Outlook

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