Economy Ministry’s projections foresee 2.5% GDP expansion and drop in inflation next year

19/09/2022

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Economy Ministry’s building in Brasília — Foto: Marcelo Casal Jr/ABr

Macroeconomic projections unveiled on Thursday by the Economy Ministry maintained an apparently optimistic tone, foreseeing relatively strong GDP growth and falling inflation at the same time.

The scenario outlined by the Secretariat of Economic Policy (SPE) includes GDP growth of 2.5% in 2023 and a slowdown in inflation to 4.5%, compared with 6.3% this year. In addition, it expects the downward trend to continue thereafter, to get “close” to the target in the following years.

In the document, the ministry does not detail what could lead to this drop in inflation. Financial market analysts also predict a decline in inflation, but without convergence to the target before 2025. To have disinflation, however, they count on a 0.5% GDP drop in 2023.

In the interview that presented the projections, SPE’s team defended the thesis that Brazil’s potential GDP is higher. In other words, they say it is possible for the economy to grow faster without pressuring inflation.

This would be the result of several factors: higher capital expenditure and imports of capital goods; more formal jobs, which are more productive; and stronger growth in technological services.

The bulletin does not say directly what the potential GDP estimated by the SPE is, nor does it present more elaborate calculations about how it might have grown due to these factors. But everything indicates that it would be a number close to 2.5%, because this is the expected long-term growth, until 2026.

It is a slightly more optimistic percentage than the market consensus; the Focus bulletin projects a 2% rise in the long term. But it is high if compared to growth rates seen in the last decades.

A point that draws attention to the Treasury’s projection is the expected growth of 2.5% next year, close to the potential GDP, while inflation is seen as slowing down.

Inflation can lose steam for a number of reasons – such as a positive external shock or an improvement in economic agents’ expectations about price indices – but the only secure way for the Central Bank to tame inflation is by slowing down activity to create economic slack.

The document does not detail whether, in the ministry’s view, there is an economic slack now – a hypothesis that the market considers increasingly unlikely given the high core inflation more closely linked to the economic cycle.

The Economy Ministry’s projections do not have much importance for the policy of fighting inflation, since the Central Bank is a great specialist on the subject and operates according to its own models. But it is an important input for outlining the fiscal scenario. If one of the two – inflation or real GDP growth – is overestimated, it means that the nominal GDP used in the calculation of revenues may also be inflated.

*By Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/