(Analysis) Brazils economy shows signs of improvement, with growth surpassing expectations for three years.Moodys recently raised its estimate of Brazils potential GDP from 2% to 2.5%.
This change reflects the impact of economic reforms implemented since Michel Temers presidency.The International Monetary Fund (IMF) shares this view, as stated in their annual report on Brazils economy released in July.Central Bank officials have hinted at this increased growth capacity for some time, though they havent officially published estimates.Mario Mesquita, chief economist at Ita Unibanco, agrees with this assessment.
He is also a former director of economic policy at the Central Bank.Brazils Economic Potential Rises, but Fiscal Challenges Persist.
(Photo Internet reproduction)However, he advises caution due to the uncertainty of these measurements.
The financial market remains skeptical about Brazils growth potential.The Focus survey revised its growth capacity estimate from 2.5% to 2% following the pandemic.
A recent poll by the Monetary Policy Committee (Copom) revealed a bleak outlook from market analysts.Despite market skepticism, Brazils economy has grown faster than economists predicted.
This growth has been accompanied by falling inflation, puzzling observers.Central Banks Revised Economic OutlookThe Central Bank recently revised its assessment of economic slack, now indicating the economy was at or above capacity in the past two years.Economic reforms since Temers government have contributed significantly to this performance.
The IMF report includes an analysis of the labor reforms effects.While Bolsonaros government implemented important reforms, environmental and democratic setbacks deterred investors.
At the start of Lulas government, market estimates for potential GDP dropped to 1.8%.Concerns about increased tax burdens affecting productive investments influenced this view.
As the economy improved, estimates rose back to 2%.The recently approved tax reform under Lulas government could further increase potential GDP.
However, the market seems to underestimate its impact.Before the reforms promulgation, the five-year potential GDP estimate was 1.9%, rising to 2% after approval.
Despite the potential for higher economic growth, fiscal challenges remain.A rough rule of thumb suggests government debt stabilizes when economic growth equals the real interest rate.
The Central Banks optimistic long-term interest rate projection is 4.75%.Even with 2.5% GDP growth, Brazil needs a primary surplus of 2.25% of GDP to address its fiscal issues.
Most economists doubt the government will achieve this goal in the coming years without structural fiscal reforms.Moodys shares this assessment but maintains a positive outlook for Brazils credit rating, signaling confidence in future problem-solving.
The road ahead for Brazils economy remains complex, balancing growth potential with fiscal responsibility.