Brazil central bank cuts 2020 GDP forecast to -6.4%, warns of uncertain recovery

Brazil's central bank on Thursday slashed its 2020 economic growth forecast to minus 6.4% from zero due to the COVID-19 crisis, and warned that uncertainty surrounding the pace of recovery in the second half of this year remains unusually high.

Brazil's central bank on Thursday slashed its 2020 economic growth forecast to minus 6.4% from zero due to the COVID-19 crisis and warned that uncertainty surrounding the pace of recovery in the second half of this year remains unusually high. In its quarterly inflation report, the central bank repeated its view from last week's policy meeting, when it cut interest rates by 75 basis points to a record low of 2.25%, that room for further policy stimulus was small.

The central bank said its dramatic downward revision was largely due to the spread and severity of the COVID-19 pandemic in Brazil, which now has the world's second-highest number of confirmed cases and deaths behind the United States. The economy is expected to recover in the second half of the year, but only gradually.

"Daily and weekly data suggest that activity reached its lowest level in April, with only a partial recovery in May and June," the central bank said. "The level of uncertainty about the pace of economic recovery throughout the second half of this year remains higher than normal," it added.

A gross domestic product slump of 6.4% is in line with market consensus and steeper than the government's -4.7% forecast. The International Monetary Fund on Wednesday slashed its 2020 GDP outlook to -9.1% from -5.3%. Inflation is still on track to undershoot its target this year and next, according to models using a mix of interest and exchange rate variables, the central bank said.

Among its key revisions, the central bank now sees Brazilian industry contracting by 8.5% instead of shrinking 0.5% as predicted three months ago, Fixed business investment is expected to shrink by 13.8% instead of declining 1.1%, and services, which accounts for two-thirds of all economic activity, is expected to contract 5.3%.

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