Positive revisions of GDP and inflation hide a cursed legacy for 2023

​The government’s measures to combat inflation and stimulate economic activity a few months before the elections have caused a wave of optimism for the second half of the year, with upward revision of GDP (Gross Domestic Product) growth projections and downward inflation in this year.

However, in parallel with the improvement forecast for 2022, there is a worsening of estimates for 2023. In the view of analysts, it is as if the Jair Bolsonaro (PL) government was anticipating the expected growth for next year, leaving a cursed legacy for those who take over the country on January 1st.

“With the electoral measures that we have seen, for each additional growth that is played for this year, it is being taken away from next year. And, for every percentage of inflation that is taken away this year, it is thrown into next year” , says the chief economist at the consultancy MB Associados, Sérgio Vale.

This dynamic appears even in the projections of the Ministry of Economy itself. This Thursday (14), the ministry revised downwards its inflation forecast for this year, from 7.9% to 7.2%, and raised the estimate of GDP growth, from 1.5% to 2%. At the same time, for 2023, the forecast for inflation rose from 3.6% to 4.5%, while that for GDP was kept at 2.5%.

Large banks share similar reading. Santander, for example, revised its GDP growth this year from 1.2% to 1.9% this year, a movement sustained by the reopening of services, the recovery of the labor market and the increase in disposable income due to the new round. of government stimulus.

For 2023, the bank maintained its forecast of a 0.6% drop in economic activity. The estimate for inflation was from 9.5% to 7.9% in 2022, but from 5.3% to 5.7% in 2023.

On July 8, Itaú had also revised its 2022 GDP forecast from 1.6% to 2%, keeping the estimate for next year at 0.2%.

According to Itaú economist Júlia Gottlieb, with the government’s economic stimulus packages, the projection of GDP contraction of 0.3% in the third quarter and 0.4% in the fourth was revised to a fall of 0.1% in both periods.

“For 2023, we have not revised the projection because, if on the one hand we have the effect of the slowdown in the global economy, on the other hand, we also have an improvement in the statistical load of 2022”, says the economist.

For the IPCA, Itaú’s projection went from 7.5% to 7.2% this year, and kept unchanged at 5.6% for 2023.

A little earlier, on July 1st, Bradesco also revised, from 1.5% to 1.8%, the projection for the 2022 GDP, but from 0.3% to 0% in 2023. The estimated inflation passed from 9% to 7.5%, and from 4.1% to 4.9%, respectively.

The improvement in the perception of analysts even led the rating agency Fitch to review this Thursday from negative to stable the outlook for Brazil’s rating. The agency’s analysts pointed to the short-term growth dynamics, above expectations, among the reasons for the movement.

Potential growth shift

Specialists point out that, although the updates in the estimates for growth may, at first, bring some relief to household income, with a positive impact on the unemployment rate, they are also accompanied by an increase in fiscal risk and a potential deterioration of the macroeconomic framework for 2023.

“With the measures adopted recently, the government is shifting the growth that we were expected to have next year to this year”, says André Perfeito, chief economist at brokerage Necton.

He also says that the new round of deterioration in public accounts due to the PEC, which seeks to inject around R$ 41 billion into the economy less than three months before the elections, should force the BC (Central Bank) to have to keep interest at levels for a longer period than previously anticipated, possibly entering and maintaining the Selic rate at 13.75% for most of 2023.

“With markets anticipating an increasing probability of a more lasting fiscal expansion, there is an upward bias for inflation expectations, and a chance of future pressure from further currency depreciation”, endorse Santander analysts in the report published this Thursday, in the which revised the projection for the IPCA for 2023 from 5.3% to 5.7%.

The bank’s estimate for the Selic rate went from 13.50% to 14.25% this year, and from 10.5% to 12% in December 2023.

Higher interest rates, added to a probable slowdown in the global economy, form a scenario in which the economy tends to lose traction over the next year, says Perfect, from Necton, which works with a GDP growth of 1. 5% for this year, and 0.5% for 2023. “You can’t get too excited about next year.”

In the Focus bulletin, economic agents consulted by the BC bet on a growth rate of 1.59% this year (against 1.42% four weeks ago), and 0.5% next year (compared to 0.55% a month ago). back).

“The fiscal picture has become more uncertain in recent weeks. The recent exemptions reduce the inflation projection for 2022, but raise that for next year”, point out Bradesco analysts in the report released at the beginning of the month, in which they revised from 0.3 % to 0% GDP growth in 2023, with the estimate of inflation going from 4.1% to 4.9% for next year.

The bank’s analysts also point out that, as the disinflation process will be slow, the BC should only reduce interest rates from the second half of 2023, with the Selic rate ending next year at 11.75%, two percentage points below the expected level for December 2022.

It’s as if the government itself doesn’t believe in reelection, says analyst

Vale, from MB Associados, says that the economic policy adopted over the last few weeks gives the impression that the Bolsonaro government itself does not believe in reelection, given the magnitude of the deterioration of the fiscal framework ahead.

“It’s a cursed legacy that Bolsonaro creates for himself or for former president Luiz Inácio Lula da Silva, in case he becomes the next president,” says Vale.

In the same vein, analysts at Itaú point out in the July 8 report that “fiscal sustainability is once again becoming a relevant challenge. It is not a concern with short-term fiscal numbers, but with the trajectory that seems to be for the future. The next government will have to define the continuity of the aid that will be implemented in the second half of this year, in addition to the fiscal framework that will be valid ahead, in an emerging economy with high public debt and high interest rates.”

Even for the more short-term scenario, the chief economist of MB Associados says that he finds it difficult to see a GDP growth of around 2% this year, given the macro scenario that is outlined for the next six months, with the increase in the volatility in the markets due to the elections and the global slowdown in developed countries.

He works with a projection of 1.1% growth in Brazil’s GDP this year, and 0.5% in 2023, in a base scenario in which the unemployment rate should struggle to stay well below double digits.

Vale also says that he sees little effectiveness in the measures adopted by the government for the resumption of growth, given the worsening they could cause both for the exchange rate, as well as for inflation and interest and, consequently, for economic activity. “The market is taking a lot of the most recent moment and stretching forward, but I don’t think this is the case”, says the economist, who cites the data released this Thursday by the BC that indicate a contraction of activity for the second consecutive month in May. .