The worsening of the economic situation, with an increase in the inflation and a high political risk, has made economists from financial institutions reduce their growth projections. Gross Domestic Product (GDP) for this year and next year.
After the lower-than-expected second quarter GDP result, the Itaú Unibanco on Tuesday reduced its expectation of activity growth in 2021, from 5.7% to 5.3%. In light of the higher interest rate scenario, the bank also lowered its projection for 2022, from 1.5% to 0.5%.
Itaú assesses that the fiscal risk has increased with the prospect of increased public spending and, if this materializes, it would have negative effects for the economy. The bank notes that the unexpected growth in spending on precatory hinders plans to reconcile an increase in Bolsa Família and the maintenance of the fiscal anchor in the country.
In a report published on Tuesday, Itaú Unibanco also raised its rate projections Selic — the country’s basic interest rate — at the end of 2021, from 7.5% to 8.25%, and in 2022, from 7.5% to 9.0%, due to the more pressured inflation scenario. The bank also raised its projection of the Broad National Consumer Price Index (IPCA) this year, from 7.70% to 8.40%, and the next, from 3.90% to 4.20%. The indicator measures the country’s official inflation.
“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 In addition, doubts about the trajectory of public accounts, especially with regard to compliance with the spending ceiling in 2022, result in more lasting pressure on the exchange rate, which should appreciate a little less than we expected before”, writes the chief economist of Itaú, Mario Mosque, in report.
The bank expects three increases of 1 percentage point in the Selic, from September to December, and a final increase of 0.75 point in early 2022.
The deterioration of the outlook for inflation worsened the economic situation and caused a series of revisions in the bank’s scenario as well. BV (former Banco Votorantim). The projection for the IPCA jumped from 7.7% to 8.2% in 2021 and from 3.6% to 3.8% in 2022. The estimate for the growth of the Gross Domestic Product (GDP) in 2022, in turn , retreated from 1.8% to 1.5%.
“We had the vision that the dollar and the raw material generated temporary shocks, but we changed the reading based on recent inflation data”, says the chief economist of the BV, Roberto Padovani. “Services inflation accelerated due to the reopening, but industrial goods inflation continued under pressure. This accumulation of shocks has pushed the IPCA to a level close to 10%, and the level matters.”
Accumulated inflation at the current level, according to Padovani, reinforces contract readjustments and generates an inertia that contaminates expectations for 2022 and 2023. Central Bank (BC), BV raised the Selic forecast at the end of the cycle from 7.5% to 9.0%. The interest rate should reach 8.5% by the end of this year and reach the level estimated at the first meeting of the Monetary Policy Committee (Copom) in 2022.
“The BC will have to raise interest rates up to 9.0%. The pace he chooses. This monetary tightening will be reinforced by worsening financial conditions, which made us change the growth scenario in 2022 [de 1,8% para 1,5%]”, says the economist.
Even with the monetary policy reaction to contain the advance of prices, Padovani foresees difficulties in the disinflation process in 2022. Although the rise in interest rates moderates exchange rate variations, there should be an increase in risk in emerging markets and also in the local market, in function of the electoral cycle. In addition, the expectation is for the maintenance of imbalances between supply and demand, especially in the industrial sector, which is still affected by problems in the global chain.
The water crisis, in turn, remains on the radar. With the continuing trend of the La Niña phenomenon, the forecast is for less rain in the period favorable to it, something that implies the use of thermoelectric plants for a longer period of time. “This prevents deflation in electricity. At best, prices will stay where they are”, projects the economist.
high fiscal risk
Another institution that revised its projections on Tuesday is the XP Investments. Analysts at the brokerage raised its end-of-cycle Selic rate forecast from 7.25% to 8.5% due to persistent and pervasive pressure on current inflation and fiscal uncertainties. The brokerage forecasts 1.0 percentage point interest rate increases in September and October, followed by a 0.75 point increase in December and a 0.5 point adjustment in early 2022.
In the presentation of a monthly report, the chief economist at XP, Caio Megale, stated that the fiscal risk and more widespread inflation were the main drivers of the scenario’s revision. In view of the uncertainty created by the processing of the Annual Budget Law Proposal (PLOA) of 2022 and the issue of court orders, the brokerage firm increased its dollar projection at the end of 2021, from BRL 4.90 to BRL 5.20, and at the end of 2022, from BRL 4.90 to BRL 5.10.
“We have a Congressional Budget that doesn’t stand still, it will need to be adjusted, including that change in the subject of precatories and a procedure with this degree of complexity, on the eve of an election year and with a political environment like we are experiencing is always a risk to the fiscal framework”, said Megale.
XP maintained its inflation projections for 2021 (8.40%) and 2022 (3.70%), citing high unemployment and low real income growth as responsible for limiting demand for services next year and containing the inertia. The broker also expects relief from electricity prices and a slowdown in industrial goods and food next year.
In the wake of increased uncertainty and high interest rates, in addition to the increase in costs caused by the water crisis in the country, XP reduced its Gross Domestic Product (GDP) growth forecast for 2022, from 1.7% to 1.3% . For 2021, the estimated expansion of 5.3% of GDP was maintained.
Technical recession is not ruled out
According to XP, the main risk on its radar for 2022 is the water crisis, since its base scenario does not consider the occurrence of rationing in the country. over a year would have the potential to withdraw up to 1.2 percentage points of GDP.
“For next year, there is an increase in uncertainties about the performance of economic activity. You can’t rule out a technical recession,” said XP economist Rodolfo Margato. The broker’s baseline scenario estimates GDP growth of 0.3% in the first quarter of 2022, followed by 0.1% expansion in the second quarter, 0.2% drop in the third and 0.2% growth in the fourth quarter .
The further deterioration of political and fiscal conditions, increasing the degree of uncertainty and reducing the liquidity of the economy, is also a risk to activity. XP’s scenario indicates a 10% to 15% probability that the exclusion of court orders owed by the government from the expenditure ceiling will lead to the exclusion of other expenditures as well, such as Bolsa Família.