Brazil's economic and social progress between 2003 and 2014 lifted 29 million people out of poverty and inequality dropped significantly (the Gini coefficient fell by 6.6 percentage points in the same period, from 58.1 down to 51.5). The income level of the poorest 40% of the population rose, on average, 7.1% (in real terms) between 2003 and 2014, compared to a 4.4% income growth for the population as a whole. However, the rate of reduction of poverty and inequality appears to have stagnated since 2015.
Brazil is currently going through a deep recession. The country's growth rate has decelerated steadily since the beginning of this decade, from an average annual growth of 4.5% between 2006 and 2010 to 2.1% between 2011 and 2014. GDP contracted by 3.8% in 2015, and is expected to fall at least 3% more in 2016. The economic crisis, as a result of the fall in commodity prices and an inability to make the necessary policy adjustments, - coupled with the political crisis faced by the country - has contributed to undermining the confidence of consumers and investors.
The realignment of regulated prices combined with the pass-through of exchange rate depreciation have caused an inflation peak in 2015 (with an inflation rate of 10.7% in December), exceeding the upper limit of the government’s target band (4.5 ± 2%), despite a tight monetary policy and high real interest rates. The inflation rate of administered prices has been decelerating and will contribute to the moderate slowdown expected in 2016. Overall inflation is still expected to end the year at over 7%, above the target ceiling.
Following the impeachment of President Dilma Rousseff on August 31st (2016), former Vice President Michel Temer took office as the new President of Brazil. He announced that his government would pursue several fiscal adjustment measures and a reform agenda to reestablish confidence and to restore a favorable investment environment. However, implementation of the reform program has proven difficult and faces opposition in Congress.
Fiscal adjustment is undermined by budget rigidities and a difficult political environment. Less than 15% of expenditure in Brazil is discretionary. Most public spending is rigidly determined (by rules in the Constitution or other legislation) and cannot legally be reduced. Budget rigidities and pension liabilities have imposed significant burdens on subnational governments, some of which have had to delay payments and may face the risk of insolvency.
The crisis has led to significant adjustments in the balance of payments current account. By July 2016, the current account deficit had dropped to 1.6% of GDP - in comparison with 4.3% in 2014 – mainly in response to the contraction of the GDP (as well as a moderate devaluation in the real exchange rate). Foreign direct investment accounted for 4.2% of the GDP 2015, thus funding 132% of the current account deficit. Brazil had an ample level of reserves of US$ 358 billion - or 18 months of imports - at the end of 2015.
Brazil’s medium-term outlook will depend on the success of the current adjustments and the enactment of growth-enhancing reforms. Raising productivity and competitiveness is the main challenge for the country to achieve higher growth in the medium-term. With the recession of growth drivers over the past decade — credit-fueled consumption, labor expansion and the commodity boom — growth will need to be based on higher investment and productivity gains.
Despite the achievements in poverty reduction over the last decade, inequality remains at high levels. After achieving universal coverage in primary education, Brazil is now struggling to improve the quality and outcomes of the system, especially at the lower and upper secondary levels.
Great progress has also been achieved in reducing deforestation in the rainforest and other sensitive biomes. However, the country still faces major development challenges - especially in finding ways to combine the benefits of agricultural growth, environmental protection and sustainable development.
Brazil played a key role in formulating the climate framework for the 2015 COP 21 and has ratified the Paris Agreement. The country has once again demonstrated its leadership role in international negotiations on climate change, showcased by significant contributions to climate change mitigation within its borders. Brazil has voluntarily committed to reducing its greenhouse gas emissions between 36.1% and 38.9% by 2020 - and it will likely reach that objective sooner.