BNP Paribas said in Sao Paulo that it expects Brazil's gross domestic product to shrink 2% this year, or double the contraction the French financial services company had projected one quarter ago.
The bank said in its quarterly Global Markets report that Brazilian economic authorities, including the Finance Ministry and the Central Bank, are having difficulty getting their numbers in order.
Brazil's GDP inched up 0.1% in 2014, and private-sector economists surveyed weekly by the Central Bank are forecasting a contraction of 1% this year.
Separately, BNP Paribas revised its inflation forecast upward, from 8% to 9%, or well above Brazil's official target range of between 2.5% and 6.5%.
External pressure - including a slowdown in growth in China, the biggest buyer of Brazilian raw materials - and domestic economic woes will force the South American giant to ramp up measures to get inflation under control and put its fiscal house in order, the report said.
The country's federal, state and local governments ended 2014 with a cumulative primary budget deficit (before interest payments) equivalent to 12.51 billion dollars, putting public finances in the red for the first time since the current reporting methodology was adopted in 2001.
To combat the country's deficit problems, the government unveiled a series of austerity measures, including spending cuts, the paring back of tax breaks, tighter credit, and a reduction in labor benefits.
Brazilian growth will be hard hit. Fiscal tightening will weigh on the government, the bank said, referring to a scenario that could adversely affect consumption and spur higher unemployment, restrict access to credit, and weaken investment.
The French bank said ”the inevitable adjustment (end to tax breaks) is now fueling inflation, and predicted that Brazil's Central Bank will raise its benchmark Selic rate to between 13% and 14%, up from a current level of 12.75%.
Higher inflation will require a new increase in interest rates,” although those rates could be lowered if there are signs of an economic recovery in 2016, it concluded.