Projections for 2023 GDP show premature decoupling between market and government

The strength of the economy in the first year of office of the next president elected to the Palácio do Planalto is seen in a divergent way by the financial market and the government. This detachment from the projections on GDP (Gross Domestic Product) for 2023 —above 2 percentage points— occurs early when looking at the entire period of the Jair Bolsonaro (PL) government.

In 2019, both oscillated in the same direction towards effective GDP. The year 2020, on the other hand, was marked by the uncertainties arising from the Covid pandemic and had a more elastic margin in July, with the market and government predicting a greater fall than the decline that took place. In 2021, the prospects have slightly diverged over time, but have fallen short of what has been achieved.

As for the 2022 GDP, the distance from the estimates reached its apex in the range from November 2021 to March this year (1.5% from the government, compared to 0.5% from the market). Since then, the projections of economists from the private sector have converged towards what was expected by the Ministry of Economy. Now, both are at the level of 2%.

Analysts’ pessimism has been openly criticized by Minister Paulo Guedes (Economy), who repeated on several occasions that “Brazil is doomed to grow” and that economists would spend the year revising their numbers upwards.

Chico Pessoa, economist at LCA Consultores, recognizes that the market was wrong to have underestimated the strength of the impact of the reopening of the economy, especially on the service sector.

But he also cites the package of tax measures and the release of social benefits boosted with the approval of a constitutional amendment on the eve of the electoral race as reasons for an unexpected deviation from initial projections and, consequently, from the scenario review.

For the future, Pessoa looks suspiciously. “We have a very serious fiscal situation for next year. There is an armed fiscal bomb,” she said. “The very high interest rate combined with household indebtedness is a major drag on GDP in 2023,” she added.

The Ministry of Economy predicts growth of 2.5% next year, but Guedes said last Friday (26) that the country will grow “even more” and the increase in GDP may be 3% or 3.5%. % in 2023. Market analysts, in turn, estimate a rise of 0.39%, according to the latest Focus bulletin, after a series of downward revisions in recent months.

In mid-July, the Secretary of Economic Policy at the Ministry of Economy, Pedro Calhman, defended the government’s estimate for next year’s GDP. “Since May, activity indicators have been coming in stronger than expected. We see a strong growth trend in the economy,” he said. “We see no reason to reduce our projection and we are quite convinced of it”, he added.

According to the economic team, the government looks more closely at the supply side and incorporates in its analysis, among other information, data on the volume of investments already contracted for 2023 and microeconomic reforms carried out in recent years.

For Guedes, economists have the “wrong” analysis models. “They have the old models, which depended on public investment. We have already changed Brazil,” said the minister at an event in Rio Grande do Sul.

According to the undersecretary for Macroeconomic Policy at the Ministry of Economy, Fausto Vieira, the country’s growth potential is greater than analysts estimate in their models. “There are indications of an improvement in potential GDP in recent years and, therefore, we end up having this more optimistic view than the market,” he said.

This conclusion was drawn from a study carried out by the SPE (Secretariat of Economic Policy), to which the Sheet had access, which compared the financial market projections in the Focus survey with the effective GDP of each year, from 2000 onwards.

Between 2011 and 2016, analysts were less conservative and ended up surprised by more negative data than expected. From 2020 onwards, the trend has reversed, with less optimistic estimates than the actual data released by the IBGE (Brazilian Institute of Geography and Statistics).

“It is the third year in a row that the data carried out indicate that, in the end, there are two deviations [desvio padrão é um conceito estatístico que expressa o grau de dispersão de um conjunto de dados] above what the market projected. This, for me, is a clear indication of the higher potential GDP”, said Vieira, without quantifying the value.

The economist at LCA Consultores says that effectively the conservatism in relation to the projections has to do with frustrations that have been seen in recent years, but adds the difficulty of measuring the real impacts of the pandemic and the unexpected fiscal policy.

For Juliana Inhasz, an economics professor at Insper, the more positive view of the government is also a way of trying to convey confidence to agents.

“The government says that everything is fine because it naturally needs to convey this idea that it is being effective, even to hold back this balance of risks a little, but it hasn’t worked out very well”.

The undersecretary of the economic team denies that the government is optimistic about the numbers. “Although our projections surpass those of the market, we were not optimistic. We were conservative, because in the last three years, we were wrong in the final result, the realized value of the GDP was above what we projected”, said Vieira.

For 2023, Santander predicts a recession of 0.6%. According to Maurício Oreng, the bank’s macroeconomic research superintendent, the monetary tightening promoted by the Central Bank is the main factor for the contraction of GDP next year, in addition to the cooling of commodity prices. Currently, the basic interest rate (Selic) is fixed at 13.75% per year.

“To control inflation, unfortunately we need to go through a slowdown in the economy. We are estimating that the interest rate will reach, in the second quarter of next year, the most contractionary level since 2003”, he said.

BNP Paribas cites, in addition to the effects of the interest rate shock, potential fiscal restrictions and the global slowdown in 2023 to have zero as a projection for next year’s GDP.

“Regardless of who wins the elections, public accounts will be in a much more complicated situation,” said Gustavo Arruda, head of economic research for Latin America at the French bank.

The economist points out that part of the extraordinary revenue that the government has used to keep the economy warm in 2022 is due to inflation tax, but remembers that inflation will slow down. He also mentions as an obstacle the resumption of the discussion on salary readjustments for the civil service.

“When I try to put the factors that matter, I can’t imagine where this growth can come from for next year. I’m more on the conservative account”, he summarized.