- Thais Carrança – @tcarran
- From BBC News Brasil in São Paulo
Economists are strongly revising their expectations for the performance of the Brazilian economy in 2022.
On Tuesday (9/14), Itaú bank reduced its expectations for GDP growth (Gross Domestic Product) next year from 1.5% to 0.5%. The country’s largest private bank also started to forecast an increase in unemployment next year, with the unemployment rate rising from 12.1% at the end of 2021 to 12.5% in December 2022.
In addition to Itaú, several other financial institutions and analysis houses started to forecast lower GDP, higher inflation and higher interest rates in the next scenario.
The growth of the GDP and the situation of the job market and income in the next year generate great expectations, as they are determining factors in the well-being of the population and in the conduct of elections in which the current president is trying to be reappointed to the position.
Understand the six main factors that have made analysts lower their expectations for the performance of the economy in the next year:
1) Higher inflation and rising interest rates
The main factor cited by analysts for the revision of expectations for GDP in 2022 is the fact that inflation next year should be above what was previously expected.
As a result, the Central Bank will have to raise interest rates further, which has a negative effect on household consumption and business investment.
“We revised our inflation expectation for 2021 to 8.4%, from 7.3% at the beginning of the month”, write economists at XP Investimentos in a report this Tuesday. “The revision was due to the worsening of the water crisis, the IPCA in August well above expectations and the wholesale inflation suggesting that there is still cost pressure in the short term.”
In August, the IPCA (Broad National Consumer Price Index) rose 0.87%, well above analysts’ expectations and the biggest increase for the month in 21 years. With that, the rate accumulated in 12 months reached 9.68%. The increase was driven by fuel and food prices and led several economists to predict higher inflation for this and next year.
In the Focus bulletin — a weekly survey of market expectations gathered by the Central Bank — the projection for the IPCA in 2021 rose from 7.58% last week to 8% this week. For 2022, the forecast was from 3.98% to 4.10%.
The inflation target for this year is 3.75% and for 2022, 3.50%, as determined by the National Monetary Council (CMN). Therefore, analysts’ estimates suggest that inflation should stay above the target for two consecutive years.
And there are still other negative risks, such as the worsening of the water crisis and the situation of government accounts, which could further worsen the inflationary picture ahead.
“In this context, we believe that the Copom (Monetary Policy Committee) will not yet see conditions to indicate a reduction in the rate of increase in the Selic rate”, write the Itaú economists, in a report, predicting that the basic interest rate will reach 9% a year in 2022, back to a level that has not been seen since 2017. Currently, the Selic is at 5.25% and it reached 2% at the lowest point.
2) Lower income growth
A second factor cited by economists for the deterioration of expectations for the coming year is the modest growth expected for the mass of income — which is the sum of all the population’s income.
“We reduced our GDP growth forecast for the next year, from 1.7% to 1.3%, writes the team at XP Investimentos.
According to the house’s economists, in addition to the more contractionary effects of monetary policy (that is, the rise in interest rates), the scenario incorporates “modest growth in the mass of expanded income available to families”, with an increase of around 1.5%, discounted inflation, mainly due to the end of emergency aid, which should not be offset by employment, and the expected increase in Bolsa Família.
The trajectory of rising unemployment predicted by Itaú also does not suggest a very encouraging outlook for the performance of the mass of income.
“The average unemployment rate will return to the pre-pandemic level only in 2023, and the equilibrium level (a little above 10%) should only be reached in 2025”, echoes MCM Consultores on the poor prospects for income and market work ahead.
3) Exhaustion of the effect of resuming services
A third factor cited by economists is that the impulse generated by the reopening of the economy this year – particularly in the services sector -, after a period of greater social distance caused by the pandemic, should weaken next year.
“Economic activity will no longer benefit from the boost arising from the reopening of the services sector, something that, in our view, will be restricted to the second half of this year,” says Itaú
The pessimism in the medium term is shared by other analysts.
“We hope that some of the service segments still impacted by covid (in particular services provided to families) will recover in the coming months, together with progress in the covid vaccination program, reopening of the economy and renewed fiscal stimulus,” writes Alberto Ramos, director of economic research for Latin America at Goldman Sachs, in a report.
“However, the acceleration of inflation, the increase in interest rates, the increase in noise and political uncertainty, and the interruption of the upward trend in consumer and business confidence may limit this positive performance”, says Ramos.
XP Investimentos warns that “high unemployment and low growth in the real mass of income limit the demand for services in 2022”.
4) Global slowdown
A fourth factor cited by analysts is the expectation of a loss of momentum in the global economy, which impacts the demand and price of commodities exported by Brazil.
The orchestrated growth of the economies this year was driven by the reopening of cities, advances in vaccination and maintenance of monetary stimuli by a good part of the Central Banks of mature economies. Next year, these factors dissipate.
“Commodity prices must adjust, especially for metallic commodities, once the growth of world economic activity slows down”, says MCM Consultores, which forecasts a record surplus of US$ 76.6 billion for the Brazilian trade balance in 2021, which is expected to decelerate to US$ 74.1 billion in 2022, in the consultancy’s accounts. The surplus is the positive difference between the value exported and imported by the country.
This is also the view of Itaú: “We see a slowdown in the global industrial sector and a fall in commodity prices next year.”
And from XP: “Going forward, we see the Brazilian and world economies slowing down, the exchange rate and commodity prices more stable, the unemployment rate still high.”
5) Worsening of the water crisis and possible energy rationing
“As if the fiscal risk were not enough, the water crisis continues to pressure production costs, increasing inflation and reducing the prospects for economic growth”, writes the XP team.
The investment consultancy revised its GDP forecast for 2022 from 1.7% to 1.3%, but assesses that the low level of reservoirs is the main risk factor for this estimate.
“Our scenario considers the effects of the water crisis and the increase in the cost of electricity on production and consumption levels, but without rationing itself (compulsory reduction)”, warn the economists.
Earlier this month, XP revised its projections for the possibility of rationing in the next 12 months to 17.2%, while Itaú doubled its probability index, to 10% in 2022.
“The water situation creates additional pressure on current inflation, via an increase in electricity bills, and also on the price dynamics for the coming year, through the inertia resulting from a higher IPCA and the risk of new measures aimed at reducing consumption of electricity,” said Itaú on Tuesday.
6) Troubled elections
Finally, the pessimism of economists for the next year weighs on the certainty of polarized and very troubled elections.
“The appeasement of the political turmoil should be of interest above all to President Jair Bolsonaro. After all, his re-election fundamentally depends on the improvement of the economy”, observe the economists at MCM Consultores.
“If the political-institutional crisis continues to escalate, the economic recovery will run out of steam. The agitated environment also gets in the way of solving fiscal political problems, such as the payment of court orders and the creation of the Auxílio Brasil program”, says the consultancy, on the threat to the program that aims to boost the Bolsa Família with an eye on reelection.
The consultancy cut its forecast for next year’s GDP from 2.1% to 1.4%.
“The main reason is the perspective of a progressive worsening of the political-institutional-fiscal framework and of uncertainties. One of the most important factors is the polarized presidential election and most likely filled with populist proposals from both sides.”
Have watched our new videos on YouTube? Subscribe to our channel!