Analysis: Favorable signs for the economy in the first half, but a scenario of deceleration ahead

The beginning of the year brought good news in terms of economic activity, with a solid pace of expansion. The Brazilian economy grew by 1% compared to the fourth quarter of 2022, after expanding by 0.7% in the last quarter of last year. This is a better performance than initially expected, considering that expectations at the end of 2021 were more cautious.

For the second quarter, the signs are also favorable, suggesting dynamism. In other words, the first semester as a whole should exhibit a positive behavior. And what explains this country’s resilience?

First, there is an important positive correlation between Brazilian activity and the international commodities cycle. During this period, geopolitics – the Ukrainian War – had a considerable impact on the already high prices of commodities, thus generating an expansionary effect for the domestic economy.

Second, we had fiscal policy stimuli in the period. Third, the normalization of restrictions associated with the pandemic also helped, as we have seen from the growth of the service sector, which has benefited the most. The labor market, on the other hand, showed a steady pace of hiring – an important counterpoint to the loss of purchasing power derived from inflation –, positively affecting the wage bill and, consequently, household consumption.

Going forward, we see a different dynamic for the economy from the second half of the year, especially considering monetary policy and the business environment.

Since the beginning of last year, the Central Bank has been raising the Selic rate, currently at 12.75% per year. The interest rate tightening cycle can be concluded at the next meeting, with an increase of 0.5 percentage point and the Selic at 13.25% pa Considering our inflation forecast, such a Selic level implies real interest rates between 7.0 % and 8.0% for the next quarters. It is a significantly contractionary monetary policy from the perspective of activity, acting with a time lag on the economy. In this context, we expect an intense effect of interest rates on growth, especially from the second half of the year onwards.

We also anticipate a more complex economic environment. The global economy is already decelerating and the trajectory of US inflation should lead to higher interest rates, generating expectations of further deceleration. In Brazil we will have the electoral period, which is compatible with greater economic uncertainty and more restrictive financial conditions, investment and consumption decisions.
This is expected to cause a slowdown in the local economy in the coming quarters, including a possible contraction in the second half of 2022 and very low growth in the first half of 2023.

Thus, we project growth of 1.1% for the Brazilian GDP in 2022. For 2023, we forecast expansion of only 0.7%, with a mostly bearish risk: in addition to the challenging external scenario, there is a chance of a slower disinflationary process in Brazil , which may keep the Selic at still high levels.

In short, it is true that the economy has brought positive news recently. But that optimism will be challenged in the second half of the year, when we will see the effects of tighter monetary policy and a more difficult economic environment. We expect low growth in 2022 and 2023, underperforming other emerging countries. This dynamic is a reminder of the challenges that the country must face in order to achieve higher sustainable growth, which reinforce the relevance of an agenda of structural advances.