IPEA Institute Projects Low Brazilian Inflation and Lesser GDP Decline for 2020

RIO DE JANEIRO, BRAZIL – The Institute of Applied Economic Research (IPEA) has revised the Gross Domestic Product (GDP) decline projection from six to five percent in 2020. According to the institute, this year’s inflation should reach 2.3 percent, below the target set by the National Monetary Council (four percent). These projections are described in two studies published yesterday, on economic growth and on price behavior.

The reason for the GDP projection revision lies in the economic indicators for Q3. “They are better than we projected. We project that in August, the industry, trade and service data remained very positive, above five percent. Trade with growth rates above February, before the crisis,” points out IPEA’s director of Macroeconomic Studies and Policies, José Ronaldo Souza Júnior.

Despite the improvement, the economic scenario marked by the Covid-19 pandemic still requires caution. The reasoning is that one cannot consider the economy without considering health. “How the epidemic will unfold in the coming months will necessarily have an impact on economic activity,” says the director. “A large spread of Covid-19 and a high number of deaths may lead to a deceleration of sectors that are possibly already recovering, mainly service sectors, such as those provided to families, which depend more on the circulation of people.”

Another concern is the fiscal situation and the National Treasury’s indebtedness. “The pandemic has brought about a sharp increase in spending, combined with a reduction in economic activity – which has impacted tax revenues. As a result, it produced a very high deficit this year, compromising the public debt and increasing the urgency to adopt measures related to the containment of public spending,” alerts the economist.

For Souza Júnior, the government will have to contain spending so that public debt may have a sustainable trajectory. He suggests the adoption of “structural measures” to reverse the issue, such as the proposed “federal pact”and administrative reform.

Despite the rise in the price of some foods, inflation does not concern the director. He believes that rebalancing will occur. “The high price encourages supply. For the next periods, particularly for next year, a rise in production is to be expected,” he says referring to the supply of products such as rice. For other products, the IPEA study points out that there is still a degree of idle capacity in the economy, which prevents a price increase.

The IPEA director believes that the Central Bank Monetary Policy Council need not raise the SELIC rate because of inflation, and that in future meetings the COPOM will maintain the rate at the current two percent.

Source: Agência Brasil