MercoPress. South Atlantic News Agency

Brazil's steep recession forecasted to continue in 2017 as economic pessimism deepens

IMF predicted Brazil’s economy will contract 3.8% this year and level off to zero in 2017, warning the uncertain recovery pace could mean another downward revision.

As the political battle to remove president Dilma Rousseff rages on, with both sides seeming to ignore the necessary confidence and certainty for normal business, economists are becoming increasingly pessimistic about Brazil's economic outlook.

 In its weekly survey of 100 economists, Brazil’s central bank found that gross domestic product is expected to shrink 3.8% this year, compared with expectations a week ago for a 3.77% contraction. The survey showed a downward revision for the 13th straight week.

Economists have reduced their outlook for growth in 2017 to just 0.2% from 0.3%.

The International Monetary Fund last week predicted Brazil’s economy will contract 3.8% this year and level off to zero growth in 2017, warning that the uncertain pace of recovery could force another downward revision. Brazil’s government is expecting 1% growth next year, according to budget guidelines released last week.

Brazil’s “once high-flying economy is impaired by a political crisis that may result in the ousting of President Dilma Rousseff in the next few months,” Dow Jones said. On Sunday, Brazilian legislators in the lower house of Congress voted to approve Rousseff’s impeachment, sending the case on to the Senate.

“The economy is not functioning properly,” Ramon Aracena, chief Latin America economist at the Institute of International Finance, said earlier this month. “And there is chaos in the political system, with spillovers in the economic sphere.”

The IIF forecasts a drop in GDP of 4.5% this year and a small rebound of 0.5% of GDP in 2017. “It could be another year of recession if the political situation does not improve,” Aracena said.

Moody’s, the ratings agency, has described Brazil as an “extreme case” in Latin America due to both its very high debt to GDP ratio and its very low debt affordability. “Domestic uncertainties continue to constrain the government’s ability to formulate and execute policies,” the IMF said.

The central bank also reported that economists reduced their estimate for Brazil’s inflation rate in 2016, as measured by the consumer-price index, to 7.08% from 7.14%. For the next year, they cut their forecast to 5.93% from 5.95%.