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Brazilian economy: encouraging news from the IMF

Posted 2021-10-04

The International Monetary Fund said Brazil’s economic performance has been better than expected “in part due to the authorities’ energetic response” as the economy emerges from the slowdown caused by the pandemic.

The IMF says Brazil’s economy regained its pre-pandemic level in the first quarter of this year and that momentum remains “favorable,” supported by positive terms of trade results and “robust” private sector credit growth.

“An improving labor market and high levels of household savings will support consumption and, as vaccination continues, pent-up demand for personal services will return,” the IMF report said.

The Fund’s forecast for economic growth in Latin America’s largest economy is for a 5.3 percent expansion of gross domestic product in 2021, unchanged from the July estimate.

The IMF projects that Brazil should grow 5.3% in 2021. For 2022 and 2023, the estimates are 1.9% and 2%, respectively.

Brazilian GDP: 5.3% growth in 2021

“An improving labor market and high levels of household savings will support consumption and, as vaccination continues, pent-up demand for personal services will return,” the IMF report said.

The Fund’s forecast for economic growth in Latin America’s largest economy is for a 5.3 percent expansion of gross domestic product in 2021, unchanged from the July estimate.

The IMF projects that Brazil should grow 5.3% in 2021. For 2022 and 2023, the estimates are 1.9% and 2%, respectively.

IMF supports monetary tightening adopted by BC

The IMF evaluated in a report as positive the Brazilian Central Bank’s performance in adopting a cycle of interest rate hikes in order to combat the rise in consumer price indexes, which was largely driven by currency depreciation and rising commodity prices.

“Directors support the current (stance) of monetary policy tightening to address rising inflation and keep inflation expectations well-anchored,” the IMF pointed out in the document.

The IMF forecasts that the IPCA will rise 5.8 percent this year, drop to 3.7 percent in 2022, and retreat somewhat to 3.3 percent in 2023. Between 2024 and 2026, the multilateral institution predicts that the indicator will present a rate of 3% in these three years.

The Fund points out that, regarding the Central Bank’s decisions on interest rates, “due to the uncertainty regarding the (economic) scenario, policies would need to continue to rely on data, complemented by proactive communication and clear forward guidance”.

Fund directors pointed out that the Central Bank’s commitment to a flexible exchange rate and “limiting interventions to contain disorderly market conditions” is welcome.

According to IMF directors, the “banking system has been resilient and supported the recovery” in the level of activity amid the covid-19 pandemic. “They agreed that the gradual withdrawal of crisis-related financial support is appropriate and endorse the authorities’ efforts to expand financial inclusion and promote competition in the banking system.”

IMF directors also welcomed initiatives by the authorities in Brazil to “adopt activities to respond to climate risks” and stressed that many of them encourage close collaboration between them and Fund staff members to “analyze climate risks in macroeconomic and financial stability assessments.”

Unemployment expected to remain in double digits until 2025

The International Monetary Fund (IMF) assesses that Brazil will have a high unemployment rate, above double digits, until 2025. Only after 2026 will it reduce to single digits, when it will reach 9.8%.

“The labor market lags behind the recovery of production and the unemployment rate is high, especially among young people, women and Afro-Brazilians,” the IMF highlighted in the document dealing with the conclusion of its executive board’s consultations with the country.

The Fund points out that the unemployment issue is one of the main challenges in the country, especially in a context marked by currency depreciation and rising international commodity prices that have raised inflation and expectations for price indexes, even if there is still a gap in output.

The IMF estimates that the unemployment rate will rise from 13.5% in 2020 to 13.7% this year. From 2022 on, the indicator should register a reduction, from 12.9% to 11.7% in 2023. In the following year it will reach 10.9% and will still be in double digits in 2025, when it will reach 10.2%. In 2026, the rate will be at 9.8%.

“Emergency cash transfers will be terminated and, in the absence of permanent strengthening of the social safety net, poverty and inequality may become more acute,” the IMF points out.

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