Financial institutions expect GDP to shrink 2.99% this year

The financial institutions' projection for the Gross Domestic Product (GDP) growth has been revised from -2.95% to -2.99%. A recovery is expected in 2017, with a GDP growth forecast of 0.86% (revised from a previous 1%).

These and other financial institutions' projections for key economic indicators are in the Focus market readout report released by the Central Bank (BC) on Mondays.

Industrial production is expected to shrink 3.45% this year, compared to a 3.5% decline projection last week. The sector is expected to see an upturn in 2017, but the growth forecast has been slightly lowered to 1.98% from 2%.

Other forecasts

The outlook for this year's National Broad Consumer Price Index (IPCA), the official inflation gauge, has changed for the second consecutive time, from 6.87% to 6.93%. Inflation should close out next year at 5.2%, a figure still far from the 4.5% target set by the Central Bank for 2016 and 2017.

Financial institutions forecast that the SELIC rate, the country's benchmark interest rate, will be raised by the Central Bank's Monetary Policy Committee (COPOM) at its meeting next week, going from the current 14.25% to 14.75% per annum. By the end of 2016, the rate is expected to reach 15.25% p.a. The increase cycle is expected to be reversed in 2017 with the bank rate closing out the year at 12.75% p.a. (as against a previous 12.5% forecast).

The SELIC rate is used in government security trading under the Special System for Settlement and Custody (SELIC), and provides a benchmark for other interest rates in the economy. Rate increases are designed to contain excess demand, a key inflation-driving factor. Higher interest rates make credit expensive and encourage saving, whilst lowering the bank rate lowers the cost of credit and boosts production and consumption, but inflation control loosens.

The outlook for the dollar exchange rate has been revised from R$4.21 to R$4.25 in the end of 2016, and from R$4.20 to R$4.23 in the end of 2017.

The projected net public sector debt changed from 40% to 39.3% of GDP this year. For 2017, the market expects the debt-to-GDP ratio to increase to 41.40%.

Translated by Mayra Borges