The risk of recession in 2022, accompanied by persistent inflation, appears as one of the main obstacles for President Jair Bolsonaro (no party) in next year’s election race, assess economists and political scientists.
The challenge is not limited to the fact, already studied in economic and political literature, that many voters vote according to their pocketbook. The worsening economy not only harms the president’s popularity, but also weakens an issue that contributed to his victory in 2018: the speech anchored in political polarization and in the customs agenda.
“The risk that the election will be more economic than ideological is the biggest threat to a government that specialized in campaigning during its term,” says political scientist Creomar de Souza, from the Dharma Consultancy, which assesses political risks.
“Of course, voters do not decide their vote exclusively for the economy, but this is perhaps the area in which they can more easily establish cause-and-effect relationships with the federal government”, says researcher Jairo Nicolau, from the Center of Contemporary History Research and Documentation, at FGV (Fundação Getulio Vargas).
In recent weeks, economic projections for the election year have deteriorated significantly.
On the eve of 2022, Brazil is still suffering from the losses generated by the Covid-19 crisis, which raised unemployment, reduced income part of the population and boosted inflation.
Throughout the pandemic, production chains were disjointed, which restricted the supply of goods and services, increasing the prices of various inputs on the international market.
The rise in inflation in Brazil had additional ingredients. Among them are the rise of the dollar amid political tensions, which raised the costs of products such as fuel, and the water crisis, responsible for making electricity bills more expensive.
The difficult scenario for 2022 has gained new chapters in recent weeks with fiscal uncertainties.
Doubts about the direction of public accounts grew after the federal government call into question the spending ceiling to pay AuxÃlio Brasil, the replacement for Bolsa FamÃlia.
Given this scenario, analysts’ projections for the GDP (Gross Domestic Product) began to shrink, and the hypothesis of recession next year —that is, a drop in economic activity— became stronger.
“The scenario is very bad for the economy in 2022”, defines the director of Asa Investments, Carlos Kawall, former secretary of the National Treasury.
“This economic scenario would be unfavorable to the reelection of anyone”, he says.
Asa projects a stagnant GDP (0%) in 2022, but does not rule out possible upward or downward changes, according to Kawall.
According to the financial institution, the Brazilian economy should experience a technical recession in the first half of 2022. Higher interest rates, still pressured inflation and uncertainties in the electoral race support the projection.
Technical recession is the term used by economists to describe two consecutive quarters of falling GDP.
According to Kawall, worsening macroeconomic conditions and fiscal risks also put the incipient improvement in the job market in check next year.
“The crisis has greatly affected less qualified, low-income employment. We are going to have a very difficult year for the labor market, from an economic and social point of view.”
Itaú Unibanco and Credit Suisse are on the list of financial institutions that project recession for the year 2022. The two banks started to forecast a contraction of 0.5% in the period.
The median of the Focus bulletin, from BC (Central Bank), which brings the projections of financial market analysts, still indicates an increase of 0.7%, but has been retreating in recent weeks. At the end of January 2021, for example, the expected increase for 2022 was 2.5%.
To complicate matters, the market sees higher inflation than initially expected for the election year. By the Focus bulletin, the median for the IPCA (Broad National Consumer Price Index) rose to 4.96%. The brand is very close to the ceiling of the inflation target in 2022, of 5%.
“The scenario for next year is quite complicated. There are several levels of uncertainty. We are not managing to take advantage of the growth opportunity when the pandemic comes out”, analyzes Sergio Vale, chief economist at the MB Associados consultancy.
MB projects GDP stagnation (0%) in 2022 in the baseline scenario. But, given the difficulties, he does not rule out an even worse result, says Vale.
According to him, the fragile economy in an election year is playing against Bolsonaro in the race for the presidency.
“In 2022, we will still be seeing remnants of the pandemic on economic activity. The federal government even managed to reform the Social Security system in the first year of its term in office. [2019], but the pandemic brought difficulties as of 2020. The government did not know how to respond”, analyzes Vale.
Because of the risks that haunt the country, the investment manager Rio Bravo started to forecast a recession for the Brazilian GDP in 2022.
The projected retraction is 0.2%, says the economist at the institution João Leal. Before, Rio Bravo estimated an increase of 0.5%.
Leal underscores that, historically, election-related uncertainties tend to push the exchange rate up, which puts pressure on inflation.
To contain prices, the BC is forced to take the basic interest rate, the Selic, to a higher level. Currently, the rate is at 7.75% per year.
In 2022, the outlook is for Selic at 11.75%, projects Rio Bravo. Asa sees an even higher rate, 13%.
The advance of Selic, reminds Leal, challenges the consumption of families and the investments of companies, slowing the economy. Political uncertainties and higher interest rates help explain the projection for a recession in 2022, the analyst points out.
“The scenario for 2022 is very complicated. We have several points of uncertainty. This does not only impact the financial market. It also affects the real economy.”
According to the historical series of the IBGE (Brazilian Institute of Geography and Statistics) started in 1996, the GDP had a four-year decline. The economy declined in 2009 (-0.1%), 2015 (-3.5%), 2016 (-3.3%) and 2020 (-4.1%). in none of them were there presidential elections.’
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