Brazil - 2003 and 2015: similar adjustments, different times

-The signals suggest that, as was the case in the first year of President Lula’s government in 2003, the first year of President Dilma Rousseff’s second government will be marked by an orthodox adjustment to economic policy, with the aim of recovering confidence and dealing with the risk of an economic destabilisation. Even though the domestic climate was more of a challenge in 2003, the current correction may – at least at the beginning – be less convincing, because of the adoption of a set of policies which are very different from those in place in President Dilma Rousseff’s first government. -The most likely outcome is that in 2015 too, both monetary and fiscal policy will make contributions to the move towards orthodoxy. Compared to the previous correction, this one will be based more on the fiscal side, and less on monetary policy. However, it is still not entirely clear whether the political support for the adjustment currently underway is as strong as it was in 2003. Furthermore, the progress in adopting economic reforms made back then is unlikely to be repeated now. -Despite the features common to both corrections, and the likelihood that, as happened in 2003, part of the credibility that has been squandered will return, the global environment and certain domestic peculiarities will not allow Brazilian activity to perform as positively in the next few years as it did in the years following the adjustment adopted at the beginning of President Lula’s first government. -If the 2003 correction allowed the country to grow healthily in the following years, supported by the emergence of China and the commodity boost, the likely adjustment in 2015 ought to give the country some slack in dealing with the turbulence associated with the moderation in Asia’s biggest economy and with the normalisation of monetary policy in the US, but not to enjoy such high levels of growth as in the past decade.

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