Projections for GDP growth in the year remain at the median of 0.7%, but a wave of revisions has already begun

01/03/2022

Armando Castelar Pinheiro — Foto: Ana Paula Paiva/Valor

While it is making its way in Congress, the so-called Proposal to Amend the Constitution (PEC) for the Transition and the expectations surrounding President-elect Luiz Inácio Lula da Silva’s government team has triggered a sharp worsening of the fiscal outlook this year-end.

Economists started to forecast higher inflation and abandoned the prospect of a reduction in the key interest rate in mid-2023 — the baseline scenario now is that interest rates will only be lowered at the end of the year or even later. Although the projections for the GDP next year have undergone few revisions so far, analysts are still debating the effects on the economy of the promised spending expansion of the new administration.

The median of the estimates of 114 financial institutions and consulting firms consulted by Valor for the GDP in 2023 is still at 0.7%, the same level as the last survey, at the end of November. In this period, at least 20 institutions lowered their projections, reflecting greater concern with the fiscal issue and the prospect that the Selic rate will take longer to fall again.

Another 22 revised their estimates upward. In this case, there was a contribution from the update of the GDP calculation for 2020 and 2021 by the Brazilian Institute of Geography and Statistics (IBGE). The updated values implied a carry over — that is, assuming a zero annual variation rate — for the 2022 and 2023 projections. The median of the projections for growth this year went to 3.0% from 2.8%.

At Claritas, the projection for 2023 was recently lowered to 0.6% from 1.0%. “We could see that Brazil would already experience a cyclical slowdown in growth because of two vectors: the lagged effect of monetary policy, which is possible to see in the figures for credit concession and default, and also because of the global scenario, with [the prospect of] recession in the United States, Europe, and the United Kingdom next year,” says Claritas’ chief economist, Marcela Rocha. “Brazil is a closed economy, but that generates lower export growth in an environment of tighter financial conditions.”

Against this picture, argues Ms. Rocha, there was only the prospect of a record agricultural harvest — with a growth of 14.6% according to projections by the National Supply Company (Conab), or 9.6%, according to the statistics agency IBGE — as well as some recovery in China, which is abandoning the zero Covid policy. But the scenario has ended up getting worse since the elections.

“The size of the Transition PEC spooked, and the market took away the Selic cuts that were planned for next year. Besides hitting the financial conditions, this has also generated an economic cost, which is the worsening of expectations and the increase in uncertainty,” he says. Claritas, however, still sees room for cuts in the key interest rate as of the third quarter.

The new government’s promise to boost public investments in the first year is seen with some skepticism. “It is necessary to see if there is enough time to spend next year. To make investment viable takes time, you need a plan,” says Ms. Rocha. “In any case, I believe that the balance would still be negative. Given the deceleration already contracted so far, this impulse given by the government may be more than offset by the increase in uncertainty.”

According to Cosmo Donato, an economist at LCA Consultores, 2023 will not have any major sector-boosting activity, but farming and cattle raising can make a positive contribution. “Growth drivers, such as industry and services, will lose strength next year. Our vision remains positive for the agriculture and cattle-raising sector, which fell by 0.6% this year and may grow by 3.1% next year,” he says, based on the prospection of harvest indicators and economic activity in China, one of the main destinations of Brazilian agricultural exports.

“But there is the distrust around the fiscal issue, which may imply a cycle of high Selic for a longer time, which weighs on the activity as well. It will be a very challenging year, without much positive news and having to be careful not to get more negative,” he continues.

“There is a lot of uncertainty in 2023. What will happen with this fiscal package is not trivial,” he says. “Next year we will still have high-interest rates holding back credit, construction that helped this year losing steam, and more indebted families,” says Armando Castelar, coordinator of the applied economics area at the Brazilian Institute of Economics of Fundação Getulio Vargas (Ibre-FGV).

The expectation is for less momentum from domestic demand and a less likely interest rate reduction scenario: “2023 will be more difficult than 2022. In part, because we are working close to the capacity limit. And the Central Bank is raising interest rates to slow the economy and control inflation. The complicating factor is expansionary fiscal policy,” says Castelar. “On one hand, you step on the accelerator. On the other, on the brakes. And one thing will get in the way of the other.”

“As the Monetary Policy Committee (Copom) has reinforced, when you have a very dynamic economy, fiscal pressures spill over into inflation, and monetary policy needs to respond to that,” says chief economist Cecília Machado. “In the short term, there may be some mismatch between the effects of these policies, so that the fiscal policy can give some more support to the economy. However, I believe that the monetary one will balance this game.”

Despite this, Ms. Machado sees upside risk to the projection, should the prospects for the agricultural harvest come true. “Agriculture is the big driver, but it also has spillover effects for other sectors, such as equipment and services. Incorporating this, it is possible to reach 1.6% [of growth next year],” she says.

(Contributed to this story Anaïs Fernandes and Marta Watanabe)

*By Marcelo Osakabe, Marsílea Gombata — São Paulo

Source: Valor International