LCA Weekly Macro View: Favorable economic outlook prevails over political uncertainties

LCA Weekly Macro View: Favorable economic outlook prevails over political uncertainties

Chamber Member News Post Date: 01/24/18 Source: LCA Consultores By: LCA Consultores
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The IMF’s global growth forecasts for 2018 and 2019 have been revised upwards. The revision was concentrated in the expected growth for major advanced economies, especially the US (as a result of the short-term boost implied by the tax overhaul). Growth expectations for some emerging countries (including Brazil) were also revised slightly higher.

Despite the upward revision in US growth forecasts, the US Dollar (USD) has weakened significantly in recent months. This weakening of the USD, moreover, has occurred in a context in which many FED directors have adopted a some-what more hawkish language (which, in principle, would tend to strengthen, not weaken, the USD). As a result, the USD Index has "decoupled" from raising interest-rates on US Treasuries.

A weaker USD may be related to an increase in the fiscal risks for the US perceived by global markets - in the short-run (because of the recent government shutdown) and in the medium-term (due to the adverse fiscal impacts of the tax reform, especially to the public debt dynamics). Furthermore, waning economic and political risks in Europe and Japan are supporting the euro and the yen.

In Brazil, the influence of the favorable external factors has prevailed over the postponement of the pension reform and the recent rating downgrade by S&P. Another factor that has helped to support a benign domestic outlook has been the consolidation of the economic recovery, which has prevailed over political and fiscal uncertainties.

The industrial confidence index, for instance, has started 2018 at the best reading since the beginning of 2011. All 32 industrial sectors that make up the confidence survey of the National Confederation of Industries (CNI) had a positive reading, of above 50, at the beginning of 2018.

As we have argued, the significant disinflation observed in recent years and the monetary policy easing cycle imple-mented since October 2016 - period in which the Selic benchmark interest rate was reduced from 14.25% to 7% - have contributed to spur household consumption and reduce the financial burden of companies.

Under these circumstances, we reaffirm our call for a 2.5% GDP growth in 2018 - a better expectation relative to the IMF’s revised forecast of a 1.9% growth for the Brazilian economy this year. Median market forecast also points to a stronger 2.7% GDP growth in 2018. Read Full Article