Brazil should grow less than Latin America average, says World Bank

Brazil should register economic growth this year below the average of its neighbors in Latin America and the Caribbean, according to a World Bank report published this Tuesday (4th).

According to the agency’s estimates, while the region’s average GDP (Gross Domestic Product) will grow by 3%, in Brazil this rate should remain at 2.5% —the Brazilian Central Bank’s projection is more optimistic and forecasts growth of 2.7% per year. end of the year.

Among the largest economies in the region, Brazil is expected to have higher growth than Mexico (1.8%) and Chile (1.8%), but below Argentina (4.2%), Colombia (7.1%) and Peru (2.7%).

The GDP forecast alone does not reveal other important factors in local economies —Argentina, for example, reached September with annual inflation of 78.5% — but it does show the difficulty in accelerating economic growth in the post-pandemic period.

The data comes at a time when the current president, Jair Bolsonaro (PL), advertises in his re-election campaign that Brazil was the country that best recovered from the world crisis. report of Sheet last month showed that since the governments of Dilma Rousseff and Michel Temer (2011-2018) Brazil has had growth below the global average, and this trend is likely to repeat with Bolsonaro.

According to the report, in most countries in the region, GDP and employment rates are at pre-pandemic levels, with sound banking systems and manageable debt burdens. The scenario predicted by the World Bank is now more positive than the forecast made in April, when the War in Ukraine was more heated and the institution expected Latin America to grow 2.3%.

For the following year, the forecast is lower. Brazil is expected to grow 0.8% in 2023, according to the study, half the regional average of 1.6% — the BC points to growth of 2.5% next year. In 2024, the forecast is that Brazil will see its GDP rise by 1.8%, while in Latin America and the Caribbean the expected increase is 2.3%.

The forecast for 2023 is lower than in the last report, in April, and the World Bank points out a number of reasons for this. First, the ongoing impact of the war in Europe, which until now had been affecting the region more leniently than other countries. Also weighing in is a forecast of a 10% drop in commodity prices next year, after growth in 2022; the slowdown in the G7 countries and China (large economic partners in the region); and rising interest rates around the world — the Fed, the US central bank, is expected to raise interest rates by another 2.5 percentage points.

This 1.6% growth for next year is close to what the region has seen over the 2010s, and is therefore classified as “mediocre but resilient” by the World Bank. These rates are “low and insufficient to really reduce poverty or influence prosperity”, says the report. “They suggest, if not a growth trap, at least continued mediocre performance.” According to the institution, it is necessary to invest in the long term in infrastructure, education and technological innovation.

One of the explanations for the continuity of economic growth, albeit low, is the lower exposure of countries to fluctuations in the dollar from foreign loans, with stronger reserves. It is also noted, according to the World Bank, that concerns about the default of loans to companies and consumers have not materialized in most countries, but, given the risk, “governments will have to simplify debt resolution mechanisms, which are currently difficult to control, and to monitor economic strength,” the report suggests.

According to the World Bank, inflation rates in the region, at levels of 10% and 8.3%, with the exception of Argentina and Venezuela, are in line with OECD member countries, even though they have exceeded central bank targets, which affects household budgets and worsens poverty.

Inflation, however, should not ease in the future, according to a series of factors. First, monetary aggregates remain high—availability of currency held by the public and bank demand deposits. In addition, rising input prices, disruptions in supply chains and the war in Europe, have outpaced the rise in consumer prices, and this difference must be passed on at some point.

Also noteworthy is the increase in the fiscal deficit in the region, with falling government revenues and increased spending to protect families and businesses during the pandemic. Across the continent, the average public debt-to-GDP ratio increased by 15 points, reaching 75.4% of GDP at the end of September 2021. With this year’s recovery, that rate has regressed to 70%, still enough to stop large investments in capital or in increasing productivity, says the report.

“Managing the higher debt burdens of the crisis and creating sufficient fiscal space for growth-enhancing investments requires careful consideration of new sources of revenue as well as the best use of existing spending,” says William Maloney, chief economist at World Bank for Latin America and the Caribbean.

According to the agency, most of Latin America’s government revenue comes from value-added taxes, that is, consumption taxes, equivalent to 23.7% of the total, which is high by global standards. Corporate Income Tax, on the other hand, accounts for 13.2% of revenues. Finally, the personal income tax is equivalent to 10.6%, low in relation to other advanced economy countries.

In order to increase revenues, governments in the region have considered increasing personal income tax, currently equivalent to 2.6% of GDP, but the measure has more negative effects in countries with an already high general tax burden, such as Brazil, Colombia , Argentina and Uruguay. In Bolivia, Ecuador, Mexico, Paraguay and a number of Central American countries, there is more scope for tax increases.

But, according to the World Bank, about 40% of fiscal adjustments in Latin America and the Caribbean come from the reduction of public investment, which can have considerable negative impacts, defends the body, since these expenses are paid for in the medium and long term. This type of cut is simpler because it faces little resistance, since the target audience most dependent on the government is, in general, poorly articulated.

It is more effective, however, to bet on more efficient spending, defends the World Bank, which cites a study according to which about 17% of spending in the region is made by poorly targeted transfer programs, bad purchasing practices and human resources policies. inefficient. Inefficient spending does not boost income, and cutting it has few negative effects on the economy, the study says.