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

07/04/2022

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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

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/