Brazil’s GDP to be between stagnation and recession in 2022

After a 0.1% drop in GDP (Gross Domestic Product) in the third quarter of 2021, most analysts expect an economy to be still stagnant from October to December this year. For 2022, there are doubts between a scenario of very weak growth or even a recession.

Among the most important factors for the coming year are the intensity of interest rate increases, the continued reopening of economic activities and the electoral environment, which tends to generate uncertainty.

The result for the third quarter was very close to what the market expected, which was stable (0%), although there was some surprise in its composition, mainly because of the drop in agriculture, which reached 8%.

The fact that the reduction in stocks in the same sector removed 0.5 percentage point of GDP also brought some optimism in view of the assessment that demand grew 0.4% in the period, driven by household and government consumption.

Rafaela Vitoria, chief economist at Inter, projects growth of 0.5% in 2022 for the GDP and says that the result will depend, mainly, on the size of the monetary tightening promoted by the BC (Central Bank). The scenario considers a basic interest rate going from the current 7.75% to 11% per year, below market projections, around 12%.

She recalls that this growth still represents a picture of stagnation for the country, but says she sees the possibility of more positive data.

This would depend on a less restrictive monetary policy, a normalization of supply problems and the possibility of a full recovery in services, which are still below the pre-crisis level.

“I think we’re going to start having a debate that we don’t need interest rate shocks anymore. Interest rate shocks have a high cost to the economy, this stagnation shows that. of a severe recession in 2022,” says Inter’s chief economist.

“We are on the path to controlling inflation, and now the debate is that Brazil needs to grow again.”

In the fourth quarter of 2021, GDP tends to be benefited again by the services sector, which still registers a base of comparison weakened by the pandemic, says economist Silvia Matos, coordinator of the Macro Bulletin of FGV Ibre (Brazilian Institute of Economics of Fundação Getulio Vargas).

This, however, would not remove economic activity from a scenario of stagnation, points out the analyst. According to her, GDP should increase by 0.6% between October and December this year and 0.7% in 2022.

“The growth of services is automatic, a consequence of the reopening of the economy. Therefore, it has to be seen with caution”, he ponders.

Economist at Itaú Luka Barbosa says that the institution maintains its projection of a 0.1% increase in the fourth quarter of this year and a 0.5% drop in GDP in 2022.

For him, a smaller increase in the basic interest rate, a stronger recovery in services and a more favorable global scenario are the main factors that could lead to a better result for Brazil.

“The economy is growing very little at the margin, close to zero. Our vision, looking more towards the future, is of a slight recession.”

In the opinion of economist Fernando Veloso, a researcher at Ibre/FGV and member of Codace (Dating Committee for Economic Cycles), the two consecutive quarters of negative GDP and close to zero suggest a stagnant economy.

“The result is, without a doubt, quite negative. The GDP is close to the level of the end of 2019. It is insufficient in view of everything that happened afterwards, in the pandemic”, he analyzes.

In a report released on Thursday, Asa Investments signals its concern with the country’s fiscal situation, amid negotiations involving the payment of the Auxílio Brasil. In the manager’s view, uncertainties regarding the direction of public accounts support projections of weak economic activity for next year.

Asa now projects a 0.5% drop in GDP in 2022. “With inflation running above double digits, we have reached stagflation [atividade fraca e preços em alta], even in a context of growing normalization of economic activity due to the reduction of the impacts of the pandemic”, points out the report.

Luciano Sobral, chief economist at Neo Investimentos, says he expects growth of 0.6% in the fourth quarter and 1% in 2022. He says he is not as pessimistic as a large part of the market, due to factors such as the recovery of the labor market and the expectation of harvest.

But he says that, to avoid falling into recession, the country needs a somewhat more stable domestic environment, which may depend on the outcome of the elections and the size of the hike in interest rates next year.

Igor Velecico, chief economist at Genoa Capital, says that the monetary tightening promoted by the BC will be felt more intensely from the fourth quarter onwards, a period in which GDP should remain stable.

He projects a drop of 0.5% next year and says that rising interest rates will be the most relevant factor to define this scenario.

He also claims that if the BC makes an insufficient increase to control inflation, the result of 2022 will be better, but the growth of the following years will be compromised.

“There are some good stories when we look to next year, the problem is that the inflation shock was so great that it is forcing the BC to give a more intense interest rate response.”