Brazil is expected to grow 5% this year but may have a strong slowdown in 2022, says OECD

The Brazilian economy is expected to grow 5% in 2021, but in 2022 there are risks of a strong deceleration and the country’s GDP is expected to increase only 1.4%, according to forecasts by the Organization for Economic Cooperation and Development (OECD) released this Wednesday ( 1st).

The expansion of Brazilian GDP is expected to be slightly below the average growth of the world economy this year, projected at 5.6%, and could be much lower than the global average in 2022, estimated at 4.5%, according to the organization.

The Brazilian economy is also expected to grow less in 2022 than that of several Latin American countries, such as Argentina (2.5%), Chile (2%), Colombia (5.5%), Costa Rica (3.9%) ) and Mexico (3.3%).

In its study on prospects for the world economy, released this Wednesday (¹) and published every six months, the Paris-based OECD states that the acceleration of the vaccination campaign in Brazil contributed to the resumption of growth this year.

Economic activity was also supported by social programs, such as emergency aid, which ended in October, which helped to maintain consumption, and by private investment. In addition, the rise in commodity prices lasted longer than expected, boosting exports.

For these reasons, the OECD revised upwards in this latest study its forecast for Brazilian GDP growth this year, which was from 3.7% in the report released in May, to 5% today.

“With the lifting of restrictions on activities and the return to normality, the accumulated internal demand was able to make up for the delay of recent months,” Priscilla Fialho, an economist specializing in Brazil at the OECD’s economics department, told BBC News Brasil.

At the same time, the OECD warns that the pace of Brazilian economic recovery is slowing down. The organization revised downwards its estimate for Brazil’s GDP expansion in 2022, which was 2.5% and went down to just 1.4%, according to the report released on Wednesday.

“The revision of Brazilian GDP projections for 2022 is mainly explained by the slowdown at the end of 2021, which should persist until the middle of next year, while bottlenecks in the industry’s supply chains remain, inflation remains high and the Central Bank continue the monetary tightening, with higher interest rates, as a response to rising prices,” says Fialho.

According to her, the recovery of the Brazilian economy should progressively accelerate again in the second half of 2022, as the bottlenecks in the global supply chain disappear. The labor market is also expected to recover and inflation will fall, resulting from higher interest rates, which should contribute to improving household income and sustaining the expansion of domestic consumption.

But the OECD points out that there are “important downside risks” to the 2022 forecast. That’s because the water crisis could last longer, leading to higher energy prices, “resulting in persistent inflation and lower growth prospects.”

Political uncertainties and increased fiscal risk could “undermine the credibility” of fiscal rules, and result in persistent inflation and prospects for lower growth for the Brazilian economy next year, warns the OECD study.

“There are many uncertainties in relation to these projections. We are not, for example, safe from a new health crisis and new mobility restrictions, as is already observed in Europe”, says the economist at the OECD.

Weaker-than-expected growth in China —estimated at 8.1% this year and 5.1% in 2022 and 2023— could also harm the performance of Brazilian exports.

Fialho claims that most of the factors that explain inflation are temporary, such as the increase in electricity prices due to the water crisis and the lack of supplies that drive up the prices of industrial goods.

Inflation

The OECD forecasts that the inflation rate in Brazil will be 7.8% in 2021, an estimate lower than that of the markets, which is 10.15%, according to the latest Focus survey released by the Central Bank. In 2022, the OECD predicts that inflation in Brazil will be 5.1%.

The organization says that fiscal reforms can also play an important role in containing inflationary pressures. “Strengthening fiscal rules would increase market confidence in the government’s commitment to sustainable finance,” the study says.

Fialho emphasizes that uncertainties regarding fiscal policy increase the perception of risk in the markets, which affects the exchange rate and makes imports more expensive, which also contributes to inflation in Brazil.

“On the other hand, changes that affect the spending ceiling and the fiscal framework in Brazil may also create uncertainty about the long-term management of public finances. This could influence inflation expectations, causing it to persist longer than the expected,” says the economist.

“For this reason, it is important to have some clarity about the fiscal plans in the short and long term. It is necessary to reduce uncertainties and increase the credibility of fiscal rules”, he adds.

The OECD also projects that the Brazilian economy should grow 2.1% in 2023 and recommends greater efficiency in Brazilian public spending. “This would create space to improve the fiscal balance and finance the government’s priorities”, says Fialho.

According to her, Brazil would need to reduce budgetary rigidity and review the earmarking of revenues, mandatory spending targets and indexation mechanisms.

The organization also recommends that Brazil adopt policies that promote sustainable activities in relation to the environment, which would increase resilience against climate shocks.

“Environmental considerations must be systematically integrated into public policies, including land use planning,” says the report, adding that subsidies for polluting activities, such as the production of fossil fuels and pesticides, must be progressively reduced.

The OECD also states that it is necessary to strengthen the agencies that monitor compliance with environmental laws. The government of President Jair Bolsonaro is criticized for having promoted the dismantling of control bodies in the area.

global imbalance

The OECD states in its study that the global economy continues to recover, but emphasizes that the recovery is unbalanced. According to the organization, there are marked differences between countries, which are reflected in health conditions, combination of policies and economic sectors.

There is a huge shortage of labor in some activities, although the level of employment has not yet fully recovered. There is also a “persisting gap” between supply and demand for some products, as well as higher food and energy costs, which have led to higher and longer-lasting price increases than anticipated, the study says.

For the organization, governments have to deal with a difficult balance between continuing to provide support to face the Covid-19 crisis and, at the same time, taking into account public finances, inflation risks and the long-term challenges after the crisis. health crisis.

“These imbalances create uncertainty and more downside risks than upside,” points out the OECD, adding that its prospects look to the future with “cautious optimism.”

The organization’s projected scenario is that the global recovery continues, that the world deals better with the pandemic and that monetary and fiscal policies remain generally favorable in 2022.

After an average global GDP growth of 5.6% this year and 4.5% in 2022, the OECD forecasts an increase of 3.2% in 2023, which represents a slight deceleration.