March 3, 2020 / 6:18 PM / a month ago

Brazil's 2020 GDP, rate outlook darkens dramatically on coronavirus

BRASILIA (Reuters) - Brazilian economic growth and interest rate forecasts for this year took a tumble on Tuesday as the U.S. Federal Reserve’s emergency rate cut highlighted the economic damage Latin America’s largest economy is likely to suffer this year.

FILE PHOTO: The Goldman Sachs company logo is seen in the company's space on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., April 17, 2018. REUTERS/Brendan McDermid/File Photo

Goldman Sachs economists slashed their 2020 economic growth forecast to 1.5%, well below the politically-sensitive 2% threshold, and Asa Bank’s Carlos Kawall said the central bank could eventually cut its benchmark Selic rate to 3.00%.

Monica de Bolle at the Peterson Institute for International Economics in Washington said Brazil could even slip into recession this year, depending on the severity of the hit from coronavirus.

The latest wave of downward revisions to this year’s forecasts came as the Fed surprised world markets with its first inter-meeting rate cut since the depths of the Global Financial Crisis in late 2008.

Alberto Ramos, head of Latin American research at Goldman Sachs in New York, said Brazil and other countries in the region will feel the hit to manufacturing and services activity, trade, tourism, and commodity prices.

“In Brazil, more monetary (easing) is appropriate given the lack of fiscal space and the fact that current and expected inflation are tracking below the target and the growth outlook remains weak,” he said in a note, explaining Goldman’s forecast change to 1.5% growth this year from 2.2%.

Ramos now expects the central bank to reduce the Selic rate by another 50 basis points this year to 3.75%. Asa Bank’s Kawall went further, predicting a 50-basis point cut later this month followed by another 25 bps in May to 3.50%.

“However, we do not rule out the easing cycle continuing, with the Selic eventually being reduced to 3.00%,” he said.

Brazil’s central bank cut the Selic rate to a record low 4.25% a month ago but appeared to close the door on further easing. The deteriorating economic outlook at home and abroad, however, may have kicked it back open.

“With coronavirus spreading, 1.5% growth this year is still on the optimistic side,” said the PIIE’s de Bolle. “I’d say less than 1%, with a non-negligible chance of stagnation or even a mild recession this year.”

Brazil’s government is expected to soon lower its 2.4% forecast for this year. Brazilian media have recently reported that powerful Economy Minister Paulo Guedes will come under pressure form President Jair Bolsonaro if it looks like 2% will not be achieved.

Reporting by Jamie McGeeverd; Editing by Jonathan Oatis and Alistair Bell

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