Collateral damage

BRAZIL ECONOMICS - Report 14 Apr 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

Trump’s economic policy is expected to cause a global economic slowdown. Despite the considerable uncertainty regarding the magnitude of this deceleration, it is reasonable to assume that global economic activity will perform below projections made just a few weeks ago. We estimate the impacts of a global slowdown on Brazil’s output gap and inflation.

According to our estimates, a negative 1 percentage point shock to the global output gap, lasting four quarters, would lead to a reduction in the domestic output gap of between 0.20 and 0.35 percentage points after six quarters, while the effect on inflation would range from 0.1 to 0.2 percentage points over the same period. Given current inflation expectations, however, even assuming a sharp global slowdown, our estimates do not indicate room for a less contractionary monetary policy than currently expected.

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