Rio Bravo forecasts GDP retraction and inflation threatening target ceiling in 2022

An extensive combination of factors imposes a downward bias on the already negative projection of Rio Bravo for the Brazilian economy in 2022, a year that, questions the house, could be the first of the third lost decade.

In a scenario report, the manager’s economists point out that 2022 “has already begun”, with a more difficult budget discussion, fiscal pressures from the political class and expectations around the presidential elections.

“It’s still too early to point out a favorite, but current polls show a difficult scenario for the future of the Brazilian economy, with a dispute centered on the past, on an economic policy that has already made many mistakes, and in the present, with a government that had various difficulties in political negotiation and in the design of reform proposals,” said Rio Bravo in a report.

“There are bad examples on both sides. The expectation is that there will be a more reasonable third option, which brings a perspective of greater economic stability, positive for the markets and for long-term growth,” he added.

The “challenging” domestic scenario in the political-fiscal scope joins abroad still under pressure due to supply and demand mismatches that should last, evaluated the manager’s professionals, who thus see inflation in Brazil as “more pressured” and close to the ceiling of the 2022 target (currently at 5%).

“The Central Bank’s efforts to bring inflation to the center of the target next year will be insufficient,” they said.

Economists estimate that the Copom will raise the Selic again to double digits, “ensuring, at least, the fulfillment of the 2023 inflation target”. But the projections for both inflation and basic interest, they pondered, have an upward bias, and the scenario depends on the fiscal situation and, mainly, on signals from the new government.

“This prospect of high fiscal risk, political uncertainty in an election year, high inflation, double-digit interest rates, bottlenecks in the supply chain, global economic slowdown and the withdrawal of monetary stimuli in developed countries constitute a difficult combination for Brazil’s growth next year,” economists said in the text, citing that the estimate of a 0.2% retraction of GDP in 2022 is also slanted downwards.

The recovery of the job market should be more gradual, making growth through consumption more difficult, and investments should be postponed, in view of the higher interest rates and electoral uncertainty, they predicted.

“This scenario may improve with the October elections, but polls indicate that, for now, this does not seem easy to envision,” said the manager in the report.

“Despite growth close to 4.5% in 2021, Brazil will start the next year, like the new government in 2023, with major challenges: inflation and high interest rates, the need to maintain fiscal sustainability and the resumption of the agenda for long-term growth,” they concluded.