Brazil’s economy is expected to grow steadily over the medium term, driven by increased public spending, despite fiscal challenges, according to a recent Reuters poll. Forty-five economists surveyed between July 8 and 18 forecast a 2.0% GDP growth for both 2024 and 2025, slightly up from the 1.8% predicted in April.
The rise in public spending has expanded Brazil’s budget deficit, which triggered a confidence crisis and asset sell-off last month. However, President Luiz Inacio Lula da Silva’s commitment to fiscal restraint has eased market tensions, though analysts remain cautious about the fiscal outlook.
The market volatility’s impact on the real economy has been contained, with a small increase in inflation expectations due to a weaker currency. The median inflation forecast now stands at 4.0% for 2024, up from 3.9% in April. Strong consumer demand and currency depreciation are driving these inflationary pressures.
Despite the central bank’s pause in interest rate cuts, a strong labor market and fiscal stimulus are expected to sustain GDP growth near 2.0%, according to Marcela Kawauti, chief economist at Lifetime Investimentos. However, these factors also contribute to inflationary pressures, with annual inflation likely to stay around 4.0%.
The central bank’s inflation target for 2024 is 3.0% with a tolerance of +/- 1.5 percentage points, making the current forecast a concern. The decision to pause rate cuts in June was aimed at addressing rising inflation expectations, a move criticized by President Lula, adding to investor unease.
The government’s growth projections are more optimistic, forecasting a 2.5% expansion this year and 2.6% in 2025, driven by aid programs. However, a recent budget freeze has not fully alleviated analysts’ concerns about fiscal sustainability.
Elijah Oliveros-Rosen, chief economist for emerging markets at S&P Global Ratings, expects only a gradual fiscal correction, with substantial fiscal deficits remaining. He projects an average general government primary deficit of -0.7% of GDP from 2024 to 2027. Similarly, Citi analysts noted that despite the budget freeze, the expected 2024 deficit reduction to -0.5% is still inadequate to meet the target range of -0.25% to 0.25% of GDP.
In summary, while Brazil’s economy is set for steady growth, persistent fiscal challenges and inflationary pressures threaten sustainability. Effective fiscal controls are crucial for maintaining investor confidence and long-term economic stability.
