Financial institutions expect 2.95% GDP shrink this year

Brazil's economy should shrink 2.95% this year, financial institutions heard by the Central Bank forecast. This has been the 13th consecutive downward revision of the outlook for the Gross Domestic Product (GDP). The industrial production is expected to decline 3.5% this year.

According to financial institutions, the economic retraction will be coupled with 6.87% end-of-year inflation, above the target range ceiling of 6.5%. Last week, the National Broad Consumer Price Index (IPCA) had been projected to stand at 6.86%. The inflation target is 4.5%, plus or minus two percentage points.

The main tool used by the Central Bank to control inflation is the SELIC, the benchmark interest rate. The Monetary Policy Committee (COPOM), the Central Bank's interest regulator, raised the rate for seven consecutive times. In committee meetings in September, October and November 2015, the Committee decided to keep the SELIC rate at 14.25% per annum. At this month's meeting, financial institutions expect COPOM to raise Brazil's bank rate to 14.75% per annum. It should close out 2016 at 15.25%.

The Central Bank's report has also covered the outlook for inflation as measured by the General Price Index – Internal Availability (IGP-DI) which remains at 6.14% this year. For the General Market Price Index (IGP-M), the forecast has been revised from 6.48% to 6.51%. The projection for the Economic Research Institute Foundation's Consumer Price Index (IPC-FIPE) has stood at 5.81%. The projection for the regulated price hike remains at 7.5%.

The projected dollar rate for the end of this year has also gone up from R$4.20 to R$4.21. The outlook for the current account, i.e. balance of the country's international buying and selling of goods and services and net income transfers with other countries, changed from $38.6 billion to $38.5 billion deficit for this year. The expected trade surplus rose from $33 billion to $35 billion.

Foreign direct investment in the country is expected to total $55 billion.

The financial institutions' forecast for the net public sector debt is 40% of the GDP.

Translated by Mayra Borges