The recession is projected to continue into 2016, due to needed fiscal adjustment, tighter monetary policy to contain inflation and a lack of investor confidence related to political uncertainty. A slow recovery is expected to unfold into 2017 as confidence in macroeconomic policies improves. Unemployment is set to increase further in 2016. Although inflation expectations have come down, the return of inflation to the central bank’s target is likely to be delayed by the recent sharp depreciation of the currency.
The prospects of a rapid improvement of the fiscal balance have deteriorated, which led to Brazil’s sovereign debt being downgraded below investment grade in 2015. Consequently, rebuilding confidence in macroeconomic policies remains the priority even though the recession makes fiscal tightening very difficult. In the medium term, stronger growth will hinge on the success of structural reforms, including a comprehensive reform of indirect taxes, lowering trade barriers and reducing administrative burdens.
Brazil has made remarkable progress in reducing greenhouse gas emissions. Declining deforestation rates have been driving this success, while emissions from agriculture and energy, including energy used for transportation, are still rising. Efforts to reduce deforestation should continue, including better monitoring, stricter law enforcement and incentive-based measures. While petrol and diesel taxes have risen recently, they are still below international averages and could be raised further.