Opinion – Solange Srour: High growth and falling inflation: until when?

The GDP release last week showed that the economy continues to grow strongly, advancing 1.2% from the first quarter. The data promoted a new revision of projections for growth in 2022. The most optimistic ones point to an expansion close to 3%; and the most cautious, for an increase between 2% and 2.5%.

At the beginning of the year, estimates for GDP growth were close to zero or indicating recession. At the same time, we have seen a significant reduction in the inflation expected for 2022. The Focus survey (conducted by the BC with market participants), which even pointed to an increase of 8.9% for this year’s IPCA, is now at 6 .6%. The combination of high GDP and low inflation is unusual, especially when the unemployment rate is around 3 pp below the average of the last 5 years.

Some factors can explain the surprising recovery of economic activity: release of the FGTS, anticipation of the salary bonus, tax drop, use of savings accumulated during the phase of restrictions on locomotion, income generated by the commodity boom and the still lagged effects of the reopening of the economy. .

On the other hand, the fall in inflation expectations occurred mainly in response to the tax cut (especially the reduction in ICMS on fuel and electricity) and the decrease in gasoline prices, resulting from the decline observed in the international market.

Neither activity nor inflation have responded to the interest rate tightening that started in March 2021. Despite the real interest rate being close to 6% (a level considered restrictive), the economy’s idle capacity has been getting smaller and smaller, and some models point out that the economy is already operating above its productive capacity. With core inflation measures –those that seek to capture the price trend disregarding the effects of temporary shocks– at 10% in the last 12 months (the same value as the last 3 months annualized), it is difficult to argue that inflation is having any effect. of weaker demand.

After the effects of the reopening and the transmission of the drop in some commodities to prices, it will be very difficult to continue with the use of ad hoc measures that stimulate the economy and curb inflation without generating a crisis of confidence in the sustainability of public debt. From a fiscal point of view, after having benefited from positive surprises on the revenue side, resulting from both the increase in inflation and the sharp rise in commodity prices, there is no more room for reducing the tax burden. We have already compromised the primary result of the public accounts for next year with a huge waiver of revenue (especially from the States’ ICMS) and with the promise of maintaining Auxílio Brasil at R$ 600.00.

Not only have we exhausted the juggling act to create spending above the ceiling, but we have also left pent-up expenses for 2023, such as the raise granted to public servants, whose salaries are frozen for 3 years. Doubts about the maintenance of the minimum wage readjustment without real gains and the probable continuation of other aids. We still have proposals to increase the salary floors of several categories, whose impact can be substantial for states and municipalities.

No wonder the scenario for 2023 is more complex. Focus figures show an expectation of GDP growth close to 0.4%, due to the lagged effects of monetary policy and the slowdown in global growth. The expected IPCA is 5.3% – a small disinflation, given the GDP expectation. This is where the high core inflation, the high inertia of domestic prices and the uncertainty about the fiscal framework weigh in.

Faced with a very uncertain scenario, the Central Bank has been signaling the end of the cycle of interest rate hikes in September. It will be an extremely challenging time: unanchored inflation expectations, no signs of a significant reduction in current inflationary pressures, less idle capacity in the economy and lack of visibility on the medium-term fiscal balance.

Of course, today’s picture for 2023 seems pessimistic, but there is no magic in the math: with a population growth of less than 1%, for Brazil to grow 3% in a sustainable way, productivity has to grow 2% – which is not has been going on for 40 years. Sustainable growth with low inflation will only be possible if we take control of fiscal policy and persist in reforms.