The consumer price index’s deflation in September can be viewed from two different perspectives: it was a boon in that it allows for further cuts in the base rate.

However, it was also an indicator that the country is still struggling to recover economic activity.

· Inflation:

The slowdown in prices has been widespread, going beyond the transitory components of the price index, such as food.

It also hit core inflation and the services sector, suggesting that this new level (2.89% in 12 months) is expected to last longer than in the past.

With current inflation at comfortable levels - well below the target (4.25%) - and expectations for next year anchored, the Central Bank is expected to reduce its base rate again by 50 basis points later this month.

This monetary easing policy should not be changed due to the currency devaluation bias associated with international tension.

The IMF has once again warned that the world economy is already experiencing a widespread slowdown, citing Brazil among the emerging economies.

· Economic Activity:

The further fall in real domestic interest rates is a key instrument to sustain, albeit gradually, a growth in the GDP.

Retail sales grew modestly again for the third consecutive month in August, keeping the annual rate in positive territory. Domestic consumption remains fragile despite some signs of improvement in the labor market.

Fiscal restrictions remain in place: As the government waits for the new social security system and tax reform bills to be passed by Congress, it can only count on extraordinary revenue gains.

· Adjustment:

Domestic adjustment will also require administrative reform. A World Bank study (2017) revealed wide pay inequalities between the public and private sector.

This differential for homogeneous functions reaches almost 96% for federal employees and 36% for state employees. Convergence only happens at municipal level.

It is the result of privileged rules of stability and automatic promotion, as well as paternalistic policies that for years have ensured significant inflation linked salary adjustments.

All of this will need to be modified to make it possible to reduce the public sector wage bill as a percentage of GDP, which is currently in the 10% range.

· Competitiveness:

These and other distortions - always related to the excessive level of direct and indirect state intervention in the economy - explain Brazil's position in the competitiveness index calculated by the World Economic Forum.

Brazil, placed 71st is the least competitive BRICS member: China 28th, Russia 43rd, South Africa 60th and India 68th. Even in Latin America Brazil is only the 8th most competitive economy.

The main constraints are domestic imbalances (gross debt to GDP ratio well above the emerging countries’ average), and a low level of trade openness.

Minister Paulo Guedes's liberal policies are expected to change this frustrating scenario by leveraging the inflow of long-term foreign capital.

In short, the macroeconomic scenario remains unclear. Inflation at historically low levels constitutes a positive factor in that it enables monetary stimulus’ policies: the base rate is heading to below 5% until December.

Wage differentials between the public and private sectors and Brazil's poor ranking in the competitiveness scale illustrate the magnitude of the structural challenges to be faced.

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