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Investors expect a pro-market name to run economy

If a politician is named for Treasury, even a pragmatic one, there may be an adjustment in assets, CIO at WHG says

11/07/2022 9:37PM  Updated 16 hours ago

Andrew Reider — Foto: Leonardo Rodrigues/Divulgação

Andrew Reider — Foto: Leonardo Rodrigues/Divulgação

The nomination of a pro-market Finance Minister in the next Luiz Inácio Lula da Silva’s administration, such as Arminio Fraga, Pérsio Arida, or, especially, Henrique Meirelles, is becoming a growing expectation in the market, and anything different from that may be enough to put pressure on Brazilian assets. The statement is from Andrew Reider, chief investment officer at Wealth High Governance (WHG).

In an interview with Valor, he said that investors have worked with three different scenarios about the profile of those who may occupy the ministry. The first is that of ideological politicians, and the second is of more pragmatic politicians, such as senator-elect Wellington Dias (Workers’ Party, PT, of Piauí), governor of Bahia Rui Costa (PT, of Bahia), and former minister Alexandre Padilha; and the third of names closer to the market.

“It seems that the chance of being an ideological politician is migrating to zero. The pragmatic politician was the consensus until a few weeks ago, but the view that it could be someone from the pro-market group is growing,” he says. “During the [past] week this has increased with Henrique Meirelles appearing a lot since he participated in an event with Lula.”

Given this expectation, Mr. Reider says, if a minister from the group of pragmatic politicians is ultimately announced, Brazilian assets tend to fall. This fall tends to be moderate, but, for the executive, the intensity may vary according to the team that will be in charge of the Treasury. “If they are several technicians, reproducing the first Lula government, it would be ok, but still a little worse than the dream the market embarked on in the last few days,” he says.

The executive recalls, however, that the global scenario also influences the performance of assets.

In case Mr. Meirelles — former Finance Minister and former president of the Central Bank — is chosen, the manager sees “the market will be a little more bullish, but not much.” In the case of an unlikely name, such as Fraga, former president of the Central Bank, Mr. Reider sees a chance for investors to get excited. “But you would have to see what the minister would say at the beginning, what would be the priorities,” he says.

According to the WHG executive, the choice of the Treasury is important for signaling what can be expected from the next government in the fiscal field. “There is talk of an increase in spending of R$100 billion to R$200 billion. A number above R$200 billion would be very frowned upon.”

While local investors are focused on the fiscal issue, foreign investors monitor inflation and when the Central Bank will have room to cut interest rates. “The two converge because if the fiscal is moderate and inflation falls, there is room to cut interest rates,” he says.

Investors abroad have already received a positive signal after the election. “The fear was that there would be something more disruptive,” he says. “In practice, I think what happened showed the strength of our institutions, with [Vice President Hamilton] Mourão and Tarcísio [de Freitas, governor-elect of São Paulo] recognizing the result immediately.”

According to the executive, foreigners see that there is a turn to the left in Latin America, with a risk of institutional rupture in some countries, but they saw that Brazil is different. “For them, this has value, although it was already expected by local investors,” he says.

Mr. Reider says Brazil was already an option for foreigners because of the several crises around the world, such as inflation and rising interest rates in the United States, lower growth in China, and the war in Ukraine. “Latin America ends up being good for a global allocator. And most countries in the region have had very anti-market elections and anti-market policies,” he says. “That leaves Brazil and maybe Mexico, which could benefit.”

*By Augusto Decker — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Economy exceeds expectations, contraction may be delayed

Monetary policy slows GDP from July, but new fiscal stimuli kick in

07/04/2022

After positive surprises with activity in the first half of the year, the Brazilian economy enters the second half of 2022 under low visibility. Since the data from the beginning of the year started coming in better than expected, analysts expected that starting in July activity would start to feel the monetary tightening in a more relevant way, slowing down. This view holds, but with the strong recovery in the labor market and the forecast of further fiscal stimuli by the government, projections of GDP contraction at the margin have been pushed from the third quarter to the fourth quarter or even to 2023.

The turn of 2021 to 2022 was marked by a general drop in projections for GDP this year, notes Santander, recalling that the median reported in the Focus survey reached 0.25% on January 20. The perception was that real interest rates had entered the restrictive field, imposing tepid activity in the first half, still sustained by the recovery of services and records in agriculture, but contractions from then on.

Since then, figures for the agricultural sector have been revised downwards, but in services, even though the omicron variant wave has postponed consolidation, expectations have even been exceeded. The sector’s contribution to GDP in the first half of the year is strong, especially in those segments most dependent on the normalization of mobility.

But even assets-related areas, such as industry and retail sales, brought positive surprises, economists note. For Santander, the continued increase in household consumption has reflected spending of savings accumulated during the worst moments of the health crisis, the expansion of the real total wage bill – in the wake of the recovery in the labor market, and the increase in government transfers – and the support for credit concession.

Santander projects 0.2% growth for the second-quarter GDP, after a 1% rise in the first quarter, but the bank’s monitor indicates that this number is higher, around 0.5%, “which implies upside risks to our annual projection,” say economists Lucas Maynard and Gabriel Couto. Santander, which was already on a more optimistic side by estimating a 0.7% growth for the GDP in 2022, now expects 1.2%.

Débora Nogueira, the chief economist at Tenax Capital, recently adjusted her projection for the GDP in the second quarter to 0.7% from 0.4%, because she says she continues “to see strong data at the end”. For her, the numbers from the labor market in April, when the quarterly unemployment rate dropped to 10.5% (it is now at 9.8%), were “a great watershed”. In addition, she mentions the resilience of credit, especially to individuals, and the fiscal stimuli of the period.

“The question was how the shock, positive for Brazil, of the terms of trade [ratio between prices of exports and imports] was going to impact the economy, how this wealth would spread. It is being by the fiscal way,” she says. The authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts alone, for example, added 0.3 percentage points to its projection for the year’s GDP, now at 2.2%.

The increase in disposable income in the second quarter also made BRCG Consultoria raise its GDP forecast for the period and the year, which went to 1.1%. But the second semester “is complicated,” says Livio Ribeiro, partner at BRCG.

The consumption of goods and services should decelerate in the second half of the year, while the total wage bill should “drift sideways,” says Santander. “If, on the one hand, employment performed better than we expected, on the other hand, inflationary surprises eroded real income even more than our scenario initially considered,” Messrs. Maynard and Couto point out. What can give support to the economy, they say, are less cyclical sectors linked to commodities and longer cycle sectors, which take longer to feel the rise in interest rates, such as construction.

Santander estimated that the upward shock in commodity prices due to the war in Ukraine pushed the risk of contraction of the Brazilian economy from the third to the fourth quarter. The bank’s respective projections are for a stable GDP and then a 0.4% contraction, versus the previous estimate of two 0.3% declines.

Tenax does not expect GDP contraction in any quarter of the second half, but highs of 0.3%. “Before, we had the fourth quarter negative. Now, we think that, with the fiscal environment and the carryover on the labor market, it will no longer be so,” says Ms. Nogueira.

Marcelo Toledo — Foto: Ana Paula Paiva/Valor

Marcelo Toledo — Foto: Ana Paula Paiva/Valor

Even if the GDP slows down in the second semester and the creation of job openings follows this movement, the unemployment rate will probably continue to fall in the period, says Marcelo Toledo, chief economist at Bradesco Asset Management (Bram).

In addition, according to him, the fiscal impulses under discussion at the moment – such as tax cuts and an increase in the cash-transfer program Auxílio Brasil – naturally lead to an upward revision of activity in the second half of the year.

“You have to wait for the outcome, but the drop in [sales tax] ICMS represents an increase in disposable income,” he exemplifies. Bram had projections of quarterly GDP closer to stability in the second half of the year; now, a slight growth is possible, according to Ms. Toledo. “We still see an upward bias in this projection of 1.9% for 2022,” he says.

On the other hand, in the second semester, the “post-pandemic” reopening effects on the activity may be practically exhausted, at the same time that the world, which had a positive contribution to Brazil’s growth in the first semester, may operate in neutrality, Mr. Toledo points out.

By Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Economists skeptical about tightening cycle ending this week

Less than 25% of the economic analysts consulted for the Focus survey of market expectations believe that the Central Bank’s Monetary Policy Committee (Copom) will end the monetary tightening cycle this week.

This is what the map of the distribution of market expectations, released by the monetary authority, shows. Less than 25% of economic analysts believe that the Selic, Brazil’s benchmark interest rate, will end the year between 12% and 13% per year.

The Copom will release its monetary policy decision on Wednesday and it is expected to raise the Selic to 12.75% per year from 11.75%, as widely signaled by the policymakers.

The question mark is whether the Copom will continue to raise interest rates in the coming meetings. In March, Central Bank President Roberto Campos Neto said that it would most likely stop at 12.75% per year. But negative surprises in the inflation indexes released since then have made analysts reinforce bets on a deeper tightening.

The map of the distributions of expectations shows that more than 70% of analysts see the Selic between 13% and 14% per year. The median expectation stands at 13.25% per year.

Besides the higher interest rate peak, analysts see a longer monetary tightening cycle. The median interest rate forecast for the end of 2023 rose to 9.25% per year from 9% last week.

The map of the distribution of expectations shows that about 50% of analysts expect an interest rate at the end of 2023 higher than 7.75% per year, with bets up to 9.25% per year. There is a large group, of about 45% of the analysts, who believe that the Selic will exceed 9.25% per year by the end of 2023, with bets as high as 10.75% per year. Around 5% of analysts think that the interest rate will exceed 10.75% per year.

The revision of bets on the size and duration of the monetary tightening cycle is linked to the faster current inflation and higher market expectations for the price index.

Last week, the median of the analysts’ projections for Brazil’s official inflation index IPCA in 2023 rose to 4.1% from 4%. Thus, it is getting further and further away from the target for the year, of 3.25%, which is today the central target of monetary policy decisions.

Only something like 5% of analysts project inflation around the 2023 target, ranging between 2.88% and 3.48%. In March, the Central Bank projected that inflation would reach the 3.25% target, but these calculations are increasingly questioned by private-sector analysts.

Some 45% of analysts project inflation between 3.48% and 4.08%. In addition, 45% of analysts forecast inflation between 4.08% and 4.68%.

Source: Valor International

https://valorinternational.globo.com

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Default rate may rise more than expected as economy sours

The combination of high interest rates and income-eroding inflation means a very favorable environment for nonperforming loans, both from individuals and companies. The figures do not confirm a substantial advance for now, which can be explained by the efforts by banks to renegotiate with their clients and give them more time or even a grace period to pay debts. Yet, several market players say the warning is blaring.

Defaults were previously expected to end this year very close to the level seen before the pandemic. Now there are concerns that they will rise substantially beyond that. At this beginning of the cycle, defaults affect first the low-income population and riskier lines of credit, such as the revolving credit card.

The latest available data provided by the Central Bank shows that defaults on non-earmarked loans, both for individuals and businesses, rose to 4.6% in January. The data is quite outdated because a strike prevented the monetary authority from releasing the credit statistics for February. Yet, even as there was growth, the figures show that the default rate is still far from the level seen before the pandemic, of 5.6%.

Those who follow the market believe that the default rate will continue to rise this year but, right now, it is difficult to predict at what pace. Experts acknowledge that the current macroeconomic scenario is a great challenge for the models. Brazil’s benchmark interest rate Selic is rising more than expected – the market already foresees a policy rate between 13% and 14% a year at the end of the tightening cycle, compared with 11.75 % now – while inflation faces even more pressure as the Russia-Ukraine war weighs on commodities prices. This impacts the population’s income and the ability of companies to generate revenue.

The banks’ hands-on approach to renegotiations prevented the most pessimistic forecasts from materializing, said Flávio Esteves Calife, the chief economist at Boa Vista. He recalled that the rate of nonperforming loans was expected to skyrocket when social distancing measures were put in place back in 2020. “That didn’t happen. The curve flattened instead: defaults didn’t skyrocket, but they spread.”

Banks are still negotiating with clients who signaled that they will not be able to pay loans on time, which helps to limit, if not totally avoid, the advance of defaults. Boa Vista’s figures, which include clients with payments in arrears, including those of credit cards, suggest that the number of defaulters rose 5.1% in March compared to February (seasonally adjusted data). In the first quarter, there was a 9.2% year-over-year growth, or a 6.7% increase compared with the fourth quarter of 2021.

“There is pent-up default and that is why we think it will grow gradually over the coming months and also in 2023,” Mr. Calife said. In the revolving credit card segment, the default rate is already at 36.2%, the highest since October 2020. “The default rate will grow. It remains to be seen how fast. Contracts paused during the pandemic turned into nonperforming loans [with at least 90 days in arrears] in the first quarter,” said Michael Burt, an analyst at LCA.

In March, credit bureau Serasa held a large event aimed at people with a bad credit score and encouraged 3.3 million agreements with a combined discount of R$5.7 billion. The company saw a 0.54% increase in the number of indebted people from January to February, to 65.17 million people, the highest since May 2020. The main debts are: bank/credit card (28.6%), utility bills (23.2%) and retail (12.5%).

“Inflation has eroded purchasing power, especially among low-income people, and this directly affects the default rate. The first thing they stop paying is the credit card because they need to prioritize utility bills and buy food,” said Matheus Moura, a manager at Serasa.

Isabela Tavares, an economist at Tendências Consultoria Integrada, said that the bank’s very active renegotiation drive has slowed down growth in defaults. For this reason, she projects that defaults on non-earmarked loans will remain below the levels seen before the pandemic: 4.7% among individuals and 2.1% among companies. In February 2020, these rates were 5.1% and 2.3%, respectively. A recent survey by the Brazilian Federation of Banks (Febraban) with its members found that the projection for default in free credit at the end of this year increased to 4% from 3.7%.

However, Ms. Tavares stressed that the data changes according to the income bracket. In December 2021, the default rate among households earning up to two minimum wages (R$2.424) a month was 4.87%, compared to 4.03% in the same period in 2020. The default rate among those earning more than 20 minimum wages (R$ 24.240) a month fell to 0.5% from 0.71%. “The scenario is very risky, and the delay in updating the Central Bank data may bring some surprises,” she said.

Felipe Salgueiro, a partner at Multiplica Capital and head of special credits and nonperforming loans, said that “we have not yet realized the default caused by the pandemic.” Banks have moved ahead of potential delays from customers, both individuals and companies, and made renegotiations, extending deadlines or even offering grace periods for the payment of debts, he said. This effort cushioned the crippling effects of the pandemic on the economy. But the impact is expected to be seen clearly in the form of defaults during the second half of this year and in 2023. “Banks are clearing out their stock of distressed loans to prepare for the new stock of distressed loans that is being created,” he said.

Guilherme Ferreira — Foto: Silvia Zamboni/Valor
Guilherme Ferreira — Foto: Silvia Zamboni/Valor

This more complex credit environment is likely to make banks more selective. And, on the other hand, it will further heat up the activity of distressed asset managers, who have already been expanding their portfolios in recent years. According to Guilherme Ferreira, a partner at Jive Investments, sales of distressed portfolios – including both non-performing loans and those seen as likely to become non-performing – are expected to range from R$40 billion to R$60 billion this year. In 2021, they ranged between R$25 billion and R$45 billion, including banks and other financial firms.

Mr. Ferreira links the beefed-up portfolios of loans in arrears to the economic backdrop of low growth, high unemployment and political instability. At the same time, high inflation shrinks the margin of companies and the disposable income of households. “Companies don’t have now the time they had when the Selic was at 2%,” Mr. Ferreira said. “Many will have a hard time paying off their debts.”

This greater supply of portfolios of outstanding loans was noticed by Strategi Capital, an asset manager focused on alternative and illiquid investments. According to founder Cristian Lara, the company had planned to allocate all the R$75 million raised by its new fund over the next two years. But in the first quarter of this year, the fund has already allocated 25%. “If we continue at this pace, we will have almost 100% of the capital invested in the first year.”

Source: Valor International

https://valorinternational.globo.com

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Economic crisis prompts Brazilians to move abroad

What are the benefits of moving abroad

The flight of Brazilians to other countries, especially to the United States, gained strength last year, with the worsening of the economic crisis in the country and the permission of people vaccinated against Covid-19 to go abroad.

In 2021, 17% of the Brazilians who left the country did not return, the highest number in the Federal Police survey, which began in 2010, when 7% of those who had left did not return. In 2019, that portion was 5%.

According to the Ministry of Justice’s International Migration Observatory (Obmigra), the continued negative balance of the movement of Brazilians and migrants residing in the country has proven to be “structural”.

This scenario is also confirmed by data on remittances from abroad to Brazil, deportations, and detentions at the U.S. border, which hit a record high last year.

Part of this flow continues to be people with low education who use illegal schemes to cross overland from Mexico to the U.S.

But, although more numerous, those Brazilians who pay for the services of coyotes to complete the crossing are only part of the picture of emigration. In recent years, and especially with the improvement of the pandemic, the number of professionals and families seeking American visas, to undertake or continue studies, has also increased.

Antônio Tadeu de Oliveira, Obmigra’s statistics coordinator, says that the large number of arrests of Brazilians at the U.S. border reinforces the perception of the occurrence of negative migratory balances, i.e., more Brazilians leaving the country.

“From 2012 to now, when the economic scenario worsens, we start to see this movement of outflows outweighing inflows,” says Mr. Oliveira. According to him, this is reinforced when we look at data from the Federal Police and the Federal Revenue (of people who stopped income to deliver their income tax returns in Brazil), as well as the number of arrests and deportations, and the increase in remittances sent from Brazilians living abroad. He notes the U.S. is the main destination for Brazilian emigration.

“With the pandemic, there were border closures and reduced flow. But what we have seen now is people here seeking opportunities in other countries. Not only Brazilians, but also foreigners,” he continues.

One of the signs of the increased flow of migrants, the number of arrests of Brazilians attempting to enter the U.S. hit a record last year. The average daily number of arrests of Brazilians at the border rose to 148.8 in 2021 in fiscal year 2021 (October 2020 to September 2021) and 18.6 in 2020 from 49.3 in 2019, according to data from the U.S. Customs and Border Protection (CBP).

In a December report, CBP said that arrests skyrocketed in fiscal year 2021 for countries that historically have not been common sources of migration at the U.S.-Mexico border, highlighting Brazilians and Ecuadorians, for example.

Brazilians ranked sixth among nationalities detained in 2021 by the CBP. The figures coincide with the number of Brazilians deported from abroad, which is the highest in a decade. In 2011 there were 2,721 Brazilians deported. In 2019 there were 2,348, slowing to 1,586 in 2020. Last year, however, the number grew to 2,449.

Sociologist Sueli Siqueira, a specialist in the migration of Brazilians to the U.S. at the Vale do Rio Doce University, says that the profile of today’s migrant is different from that of previous decades.

In the past, the most common thing was adults traveling alone and looking for ways where they could not be noticed by the police. Today, whole families migrate and want to be noticed by the authorities.

“Now they turn themselves in, as if they were falling, which gave rise to the name ‘cai cai’ [falling] for the agents or coyotes who make this crossing possible,” says Ms. Siqueira. “Since they are with children, they are detained, but no longer separated, as was the case under [former U.S. President Donald] Trump. A date is set to present themselves to U.S. immigration and they are given an ankle monitor or cell phone [by which they are monitored]. Sometimes the deadline to report is quite long and it gives them time to settle down and get a house, a job.”

She adds that not only are whole families migrating nowadays, but the intention is to go and not come back.

“They are entire families, with children, mother and mother-in-law, who close their homes and have no intention of returning. Before they migrated, earned money, and came back. There was the idea of returning and sending remittances to relatives. Today, the intention is to migrate with the whole family and not return,” she says.

Even with this change, the amount of remittances sent by Brazilians living abroad has been growing, especially those from the U.S.

According to Central Bank data, total international remittances sent from Brazilians living abroad to Brazil rose to $3.8 billion in 2021 and $3.3 billion in 2020 from $2.9 billion in 2019. Of the $500 million more sent last year, compared to 2020, over $450 million came from the U.S.

The U.S. tops the ranking of countries of origin of remittances to Brazil. In 2021, more than $2 billion left the U.S., 28.9% more than the previous year. The UK came second, followed by Portugal, Switzerland, and Spain.

Maxine Margolis, anthropologist at the University of Florida and author of the books “An Invisible Minority: Brazilians in New York City” (2009) and “Goodbye Brazil: Brazilian Emigrants in the World” (2013), says that more than the desire to enter the U.S., today there is a strong desire to leave Brazil.

“There was a feeling among many Brazilians that, with [President Jair] Bolsonaro, things would get much better. But the economy is not going well, and many have lost confidence,” she says, remembering that a Brazilian earns in one week doing cleaning in New York what he would earn in four weeks working in Brazil.

Source: Valor International

https://valorinternational.globo.com

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Economy Brazil unemployment at 11.2% in February

Desemprego elevado é um dos maiores desafios do Brasil após crise sanitária

The unemployment rate in Brazil reached 11.2 percent in the mobile quarter encompassing December 2021 through February this year. The index is lower than in the quarter ended in November (11.6%) and in the one ended in February last year (14.6%).

The figures can be found in the Continuous PNAD (National Household Sample Survey), released today (Mar. 31) by the Brazil’s official statistics agency IBGE.

The jobless also declined in number to 12 million in the quarter ended in February, down 3.1 percent from the previous quarter (ended in November), or 389 thousand fewer people. Compared to the same quarter last year (ended in February 2021), the drop was 19.5 percent, 2.9 million fewer people.

The employed population (95.2 million) remained stable from the previous quarter, but rose 9.1 percent against the same quarter last year.

Source: Agência Brasil

https://agenciabrasil.ebc.com.br/en

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GDP survey shows stagnant economy

Claudio Considera — Foto: Leo Pinheiro/Valor
Claudio Considera — Foto: Leo Pinheiro/Valor

The economic activity fell 1.4% in January compared to December, according to GDP Monitor — an indicator calculated by think tank Fundação Getulio Vargas (FGV) to measure the monthly evolution of the economy, unveiled on Monday.

Claudio Considera, the economist in charge of the readings, says that the result indicates stagnation in the economic activity in early 2022. This is because there are no signs of robust reaction in key segments of the economy, such as household consumption and services economy — the latter representing more than 70% of the GDP.

According to him, Brazil does not have, at the moment, conditions for sustainable growth this year, and is expected to end up with a variation close to zero in the GDP in 2022, compared to last year. “We have today a perfect picture of a totally stagnant economy,” the specialist said.

FGV also unveiled that, in the GDP Monitor, the economy grew 1% in the moving quarter ended in January, compared to the one ended in October 2021. Compared to January last year, the economy grew 1.2% in January this year, with expansion of 2% in the quarter ending in January, compared to the same period in the previous year.

Mr. Considera said, however, that those increases are favored by the low base of comparison, referring to last year, and do not represent the economy accelerating at the beginning of 2022.

This is because the faster advance of vaccination against Covid-19 only happened in mid-2021, when the gradual reopening of the economy began to take place, as people went back to work and restrictions on circulation were eased. Immunization against the disease started in Brazil only in January last year — a month in which the economy, especially in the commerce and service sectors, was operating at a weak pace, hampered by the pandemic, and was strongly affected by social distancing measures designed to contain contagion.

On the demand side, one factor that help form the current moment of weaker activity is the weakening of household consumption at the beginning of the year, Mr. Considera said. In the GDP Monitor, in January, household consumption fell 1.3% compared to December last year.

There was an increase of 2.2% compared to January 2021, but the analyst said that the use of a low base of comparison influenced upwards the high results seen in the indicator in January 2022. In the moving quarter ended in January versus the one ended in October, household consumption grew only 0.8%.

“Household consumption is falling, and now with higher inflation it will be even harder to grow,” he noted, adding that higher inflation leads to lower real household income. “We are not seeing any sign of improvement [in family consumption],” he said.

Another aspect Mr. Considera mentioned was the Russia-Ukraine war, which has led to a surge in the price of oil abroad and to increases in fuels in Brazil. As long as the war goes on, the price of a barrel of oil in the foreign market may remain high, making prices soar in the Brazilian domestic market, he said.

On the demand side, the services sector is not showing good signs on the margin either. In January, this activity fell 1.7% compared to December last year in the GDP Monitor.

According to Mr. Considera, the factors at the moment indicate that the country does not show the necessary conditions to grow above 1% a year in 2022. “I don’t see conditions to strongly grow this year. We are expected to have a very weak growth of 0.6%, 0.7% [in the 2022 GDP],” he said.

Source: Valor International

https://valorinternational.globo.com

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Brazilian GDP expected to rise 4.5% in 2021

What is Gross Domestic Product, and what does it measure?

The Brazilian economy is expected to have closed 2021 at a faster pace in November and December, offsetting the weak performance in October. In the year, GDP growth is expected to have reached 4.5%, after the 3.9% drop with the pandemic in 2020.

For this year, expectations still tend to shape in the coming days depending on the evolution and consequences of the war waged by Russia against Ukraine. One reading is that the pattern of last year will be repeated in Brazil: growth concentrated in the first quarter, but with the GDP ending the year much weaker. Another reading, which can take shape, is that the conflict will undermine the drive expected for activity at the beginning of the year.

A survey by Valor with 67 financial and consultancy firms shows a median projection of 0.2% GDP growth in the fourth quarter of 2021, compared to the immediately previous three months, seasonally adjusted. In the second and third quarters, there were drops by 0.4% and 0.1%, respectively.

On the supply side, agriculture is expected to grow 6.1% from October to December 2021, but the sector has seen significant declines in previous quarters, explained by adverse weather events and harvest losses, which will still make the agriculture GDP fall 0.2% in the year, analysts estimate.

Industry even managed to grow in December, but it is unlikely to be enough to prevent a 1.5% contraction in the fourth quarter of 2021, compared to the third quarter, according to estimates. The industry suffered throughout the year with bottlenecks in global production chains. Still, after contracting 3.4% in 2020, it is expected to increase by 4.4% in 2021.

More sustained growth, however, must come from services. While the sector may slow down from a 1.1% rise in the third quarter to a 0.2% rise in the fourth, according to projections, it would end 2021 up 4.6%, after a drop of 4.3% in the previous year. “A good part of this fourth quarter result is supported by services, which should still follow in pace of recovery with vaccination. But for the rest, it’s an very weak picture,” said Marcos Ross, chief economist at Haitong. He sees GDP up 0.3% in the fourth quarter of 2021.

On demand side, in the last three months of 2021, only government consumption (up 0.4% from the third quarter) and imports (1.8%) are seen as not contracting. Gross fixed capital formation (GFCF, a measure of investment) is expected to fall 0.1%, while household consumption is expected to drop 0.1%, and exports to decline 2.7%. In 2021 as a whole, however, investments are expected to rise 16.6% after falling by 0.5% in 2020, while household consumption is expected to rise 3.4%, only partially recovering the 5.4% loss in the previous year.

Like Mr. Leal, Flávio Serrano, chief economist at Greenbay Investimentos, says that activity indicators in the fourth quarter reinforce the idea of exhaustion of fiscal stimuli that helped to avoid even greater losses in 2020. He sees, however, the possibility of a 0.1% contraction of GDP between October and December 2021, compared to the previous three months.

Depending on the GDP result for the fourth quarter, the change in growth forecast for last year as a whole would just be “a fine adjustment”, says Mr. Ross, with Haitong. “The things is to determine whether the growth was 4.5% or 4.6%. It even looked worse, which would be below 4.5%, but the November and December data show that perhaps it was not. But if you think about a broader discussion, it doesn’t make much difference.”

The end of 2021 is likely to leave a “statistical carryover” of 0.1% for 2022, a number that has already been negative in the economist’s accounts. “It’s a detail for the better, but it shows that there’s a growth problem yet to be solved,” says Mr. Ross. Although the December numbers have “a kind of positive feeling,” this is not a perception likely to be sustained in 2022, according to him.

The consequences of the war may prove to be a problem for Brazil, due to the potential pressure on energy and grain prices. And even though Brazil’s trade relations with Russia and Ukraine are limited, the conflict tends to weaken the pace of the economies of several countries more dependent on trade with the Russians – which would also have a secondary effect on activity in Brazil.

In addition to the potential damage of the war, 2022 had already begun under the effect of the triggering of contaminations by the omicron variant. But José Pena, chief economist of Porto Seguro Investimentos, believes that although January may have lost a little steam because of the pandemic outbreak, it was not to the point of having compromised the activity. Mr. Pena projects a GDP close to stability in the period and says he is cautious about the rest of the year.

The survey carried by Valor points to a median growth of 0.3% for the 2022 GDP. Mr. Ross projects a 0.1% rise from January to March, compared to the fourth quarter of 2021, and sees a contraction of 0.4% in the Brazilian activity this year. The effects of the monetary tightening throughout 2021 will be more evident in activity in 2022 and are expected to be boosted by high indebtedness and lower credit supply, points out Mr. Serrano, with Greenbay, who also foresees a 0.5% drop in GDP in this year.

Mr. Leal projects a 0.3% increase in GDP in the first quarter of this year, with seasonal adjustment. The same variation is estimated for the activity in 2022. But he recalls that projections for this year still do not consider possible effects of the war between Russia and Ukraine. It is still uncertain, for example, how long agricultural commodities and oil prices can stay higher, which affects global and domestic inflation. This scenario, accompanied by a devalued exchange rate due to risk aversion, can lead to a higher interest rate than expected for the year, he notes, which would further restrict activity.

Mr. Leal says he believes the peak impact of the current monetary tightening cycle on the economy is likely to happen between the second and third quarters of this year. “The question mark is the repercussion of this for the 2023 economy.”

Source: Valor International

https://valorinternational.globo.com

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