By Gabriel Burin
BUENOS AIRES, July 13 (Reuters) – Brazil’s economy will keep growing moderately after October’s presidential vote, a Reuters poll suggested, with a fall in farm output arising from the El Niño weather pattern, and persistent pressure on public accounts.
Efforts next year to narrow budget deficits may again hinge on tax hikes rather than expenditure cuts, analysts said, possibly extending the government’s spending-led growth strategy of recent years.
President Luiz Inacio Lula da Silva is currently topping opinion surveys.
Gross domestic product is forecast to expand 1.9% this year and 1.8% in 2027, according to median estimates from 40 analysts polled July 6 to 10, nearly unchanged from forecasts made in April.
Economists at XP Investimentos halved their estimate for primary sector GDP growth this year to 1.5% from 3.0%, in large part because of the impact on crop yields from warming temperatures as a result of El Niño. That is one more reason Brasilia may be disposed to keep spending in coming months.
“Our base case remains that a likely Lula victory is accompanied by further fiscal support ahead of the election, putting pressure on public finances and weighing on investor sentiment,” economists at Societe Generale said.
Inflation is forecast to average 4.7% this year and 4.1% in 2027, up from 4.5% and 3.9% in the April survey.
With worries about consumer price trends lingering, respondents suggested Brazil’s central bank would only make one more quarter-point interest rate cut from the current 14.25% during the rest of the year to 14.00%.
A survey taken in June had suggested there would be 50 more basis points of easing. The end-2027 consensus view for the Selic rate was unchanged at 12.00%.
“On rates, we continue to expect the BCB to resume easing later this year and forecast 50 bps of cumulative cuts by year-end, although the path has become more complicated by renewed Middle East tensions, higher oil-price risks and lingering geopolitical uncertainty,” Societe Generale economists wrote.
TAX HIKES?
Eight of 18 responses to an extra question allowing multiple options said higher taxes would be the most likely government choice to meet increasingly difficult fiscal goals next year.
“Beyond any lack of commitment to making cuts, the government faces a constraint inherent in the budget itself, which consists of over 90% mandatory spending,” Rafael Prado, an economist at GO Associados, said.
There were six answers for spending cuts, three for other measures and one for “none”. No respondent expected privatization of state assets to raise revenue.
This reflects some expectations of a potential extension of Lula’s strategy of focusing on raising extra income while enabling fast expenditure growth to support the economy.
Under his fiscal framework, Brazil has been running a primary deficit which, together with “quasi-fiscal” measures such as sectoral loan programs and a steep interest bill, continues to feed a large general budget gap and debt.
The scheme is only expected to start delivering small primary surpluses from 2028 and requires additional fiscal measures, the Treasury said in June without offering any detailed plans.
Pensions, the main legally mandated expenditure which cannot be easily trimmed, have risen quickly recently. Economists say the new government should push for pension reform but also acknowledge this may prove hard.
(Other stories from the Reuters global economic poll)
(Reporting and polling by Gabriel Burin in Buenos Aires; additional reporting by Isabel Teles in Sao Paulo; Editing by Ross Finley and Andrew Heavens)
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