How bad can Brazil get? According to market research firm Gavekal Dragonomics, “much, much worse”.

In his most recent article on Brazil (“The Land of Wishful thinking”), analyst Arthur Kroeber writes that the extraordinary deterioration of the Brazilian economy is nowhere close to playing out.

Here’s his 2-cent:

“The combined effect of all these negative economic factors, the necessary but painful fiscal tightening, and the lack of any other plausible sources of near-term growth, is that Brazil’s economy will likely contract by -1-2% this year, with another somewhat smaller drop in 2016. This would be the first time since 1929-30 that Brazil’s economy has shrunk for two consecutive years. On top of that, inflation is accelerating, and at 7.7% is at its highest rate since 2005… it’s clear that Brazil is caught in a dire stagflationary trap.”

He also predicts that the stock market and currency will fall further.

“… deeper selloffs are in store. Many major Brazilian institutions sold their domestic equity positions months ago, and private wealth is streaming out of the country. A common theme in our talks with investors was perplexity that foreign money continues to flow into Brazilian stocks. Once foreign investors wise up, equity prices and the real will both tumble much further.”

He finishes the article saying that  “for the next year or two there is little reason to expect anything other than more pain.”

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