Moderate recession and lower US interest rates favor Brazil

The contraction of the US economy for the second consecutive quarter could lead the US central bank to raise its basic interest rate less, a factor that should ease the expected recession to contain the rise in inflation, which is at the highest level in 40 years.

The data is also good news for Brazil, since a lower interest rate differential for the largest financial market on the planet helps to contain the devaluation of the real.

The US economy shrank 0.9% in the second quarter of 2022 in annualized terms, after shrinking 1.6% in the previous three months, according to data released on Thursday (28).

The US highlights the GDP (Gross Domestic Product) data in annualized form, basically the multiplication by four of the result for the quarter — the rounded number of 0.2% in this case.

It is also common for economists to use the term “technical recession” when there are two consecutive drops in the indicator, but neither the US government nor the agency that analyzes the country’s economic cycles assess that the country is in this situation.

The disclosure of the number, however, stirred global markets. The yield curves in the US, a good thermometer on the path of money, point to the need for a smaller monetary tightening, which can also be seen as a sign of a further retraction of the US economy expected in the coming quarters.

“The US is already in a technical recession. Now, if it is a recession, it is not widespread. The job market has never been so strong. It is an atypical situation”, says economist Vitoria Saddi, from the international markets area of ​​the consultancy SM Futures.

Rachel de Sá, head of economics at Rico, says that the scenario is far from the last major crisis in that country, in 2008 and 2009. First, because unemployment remains at a historically low level. In addition, the financial sector, families and most companies are in a better financial situation than that observed after the collapse of the investment bank Lehman Brothers.

“Despite the fall in GDP and the technical recession scenario, we do not expect the American economy to enter a period of strong contraction and crisis”, says the economist, who projects growth of 1.6% for the American economy this year.

She says that if inflation returns to normal, the Federal Reserve could ease the rate hike towards the end of 2023. “Otherwise, rates may need to go even higher, deepening the recession, but we this scenario as less likely.”

Francisco Nobre, economist at XP, also assesses that interest rates in the US may start to fall at the end of next year and that the Fed should reduce the pace of monetary tightening from now on. He projects two more rate hikes — 0.50 and 0.25 percentage points this year —, with expansion of 1.6% and 1.5% for the US economy in 2022 and 2023, respectively.

The manager of the Economic Department of Banco ABC Brasil, Daniel Xavier, also says that the Fed should moderate the pace of interest rate hikes in the next meetings and even deliver a level below 4% per year at the end of this cycle. “We project 3.25%, 3.50% for the Fed Funds Rate in December 2022. Yesterday [quarta-feira]Jerome Powell, chairman of the Fed, has also signaled in this direction,” he says.

Vitoria Saddi, from SM Futures, says that the market’s view is optimistic in the face of the inflationary challenge in the US. “To lower inflation from 10% to 2%, you will have to produce recession, a drop in GDP and an increase in unemployment.”

‘Surprise’

Consecutive quarterly contractions meet the technical definition of a recession, although the United States is dependent on the determination of a group of researchers at the National Agency for Economic Research who analyze a wider range of factors.

The White House has maintained that the US economy remains strong and is not currently in recession, with Treasury Secretary Janet Yellen saying earlier this week that she “would be surprised” if the agency declared it was.

But two consecutive quarters of negative growth will add even more pressure to President Joe Biden, who faces low approval ratings and has repeatedly cited a strong economy as one of his administration’s key achievements.

Shortly after the data was published, Biden said: “It’s no surprise that the economy is slowing as the Federal Reserve acts to reduce inflation.

“But even as we face historic global challenges, we are on the right track and will go through this transition stronger and safer. Our job market remains historically strong.”

At a news conference on Wednesday, after the Fed raised interest rates by 0.75 percentage point for the second month in a row, central bank governor Jay Powell said he did not believe the country was in recession. .

Despite the drop in GDP, personal consumption, which provides information on the health of the American consumer, grew 1% in the second quarter, compared to a growth of 1.8% in the first three months of the year.

The biggest drag on second-quarter GDP was falling business inventories, which took 2 percentage points off the main figure.

Some economists believe this was a lingering effect of last year’s pandemic economy, when business inventories rose as shelves were replenished after supply chain bottlenecks related to Covid-19 began to ease.

The drop in inventory investment also reflected the dampening impact that the Fed’s interest rate hikes had on business investment, economists said.

With information from the Financial Times