Brazil has experienced an unprecedented economic and political crisis, with two successive years of recession (2015–2016). A slowdown in private consumption, the main engine for growth, and a decline in investments were the leading causes. In 2017, the Brazilian economy is expected to gradually move into growth. The return of macroeconomic stability thanks to the ongoing budgetary adjustments and the return of confidence within the industrial and services sectors should lead to increased investments during the year. The government’s plans for public sector concessions (airports, motorway sections) are expected to attract local and foreign private investors. The Brazilian development bank (BNDES) is also expected to make a contribution and offer funding solutions for interested parties. Despite the easing of inflation, household consumption is likely to continue suffering with the high level of unemployment and the reduced supply of bank credit. Foreign trade should make a positive contribution to growth thanks to the vitality of exports (particularly primary) whilst imports will hold at a moderate level. Finally, the slowing in inflation, progress in the budget reforms and the as yet slow recovery in economic activity should lead to a gradual reduction in interest rates.

The public deficit is likely to contract gradually as the reforms being undertaken by the government of President Michel Temer are implemented. On his arrival in power in May 2016, the president announced a budget readjustment plan aimed at slowing the growth in public spending. A number of measures are being proposed, in particular the placing before parliament of an amendment to the Constitution (PEC) intended to set a ceiling for increases in spending. The PEC was approved on the first vote in the Chamber of Deputies and in the Senate at the end of 2016. In 2017, the government’s political agenda is expected to focus on reforming the retirement system, including the extending of the contribution period with a minimum legal retirement age of 65. Reforms to labor laws, including a relaxation in the working time provisions, are also on the political agenda. In the shorter term, the recovery in economic activity, slow as it may be, should help the government stabilize the decline in its revenues (in particular taxes and duties) resulting from the economic contraction. All of these initiatives are aimed at reducing future public deficits and slow the growth in the public debt, the speed of which is a cause of concern and is costly, notably in terms of the country’s external creditworthiness. The risk associated with the external public debt is however limited (75% of the debt is held by residents) and the level of the currency reserves (19% of GDP) limit the danger of a currency crisis. The appreciation of the dollar could however impact on the real exchange rate during the year, despite a gradual re-emergence of confidence in the country among investors. In terms of foreign trade, the current account deficit contracted in 2016, thanks to the re-emergence of the foreign trade balance surplus following the fall in imports. The weakness in domestic demand together with the depreciation of the real again the US dollar led to a sharp drop in imports. The trend is likely to continue in 2017. The rise of the US dollar and the low level of household demand are likely to contribute to a slowdown in imports, in particular in consumer goods. Exports however should feel the benefits of the vitality of the agricultural (most notably soya) and livestock sectors, as well as, to a lesser extent, exports of manufactured products which will benefit from the weakness of the real and the gradual upturn in regional demand. This should also lead to an increase in exports of services (mainly transports) to neighboring countries.

Officially appointed Brazilian Head of State at the end of August 2016, following the impeachment of Dilma Rousef, his predecessor, Michel Temer is expected to hold office until the next presidential elections in 2018. In political terms, he seems to have already successfully established a consensus within the multiparty coalition in Congress, thus consolidating his position as president; however the stability of the political context is far from secure given the possibility of further revelations involving members of the government in the Petrobras corruption scandal. In economic terms, the president is expected to adopt more orthodox policies and ones that are more favorable to business than those of his predecessors, with a focus on budget management. The promotion of conventional policy measures, reforms to pensions and the labor laws, are however likely to weaken the popularity of the new government, given that the Temer government does not have the support of the entire population. Brazilian foreign policy is expected to focus on building the country’s exports and on its strategic partnerships with Argentina, China and the United States.