BC cuts its projection for the 2022 GDP in half and now expects a 1% increase

The Central Bank revised downwards its projection for the GDP (Gross Domestic Product) of 2022 this Thursday (16). According to the quarterly inflation report, the monetary authority expects activity to grow 1% in the period.

In the previous document, from September, the forecast was for an increase of 2.1%.

BC’s estimate is above market projections. In recent months, economists have lowered expectations for the performance of the economy next year.

With the economic scenario deteriorating and fiscal risk increasing, financial institutions and analysts expect a 0.5% increase in GDP for 2022, according to this week’s Focus report. A month ago, the expectation was 0.93%.

The BC justified that negative surprises in recent data suggest a slowdown in activity next year. In addition, the autarchy attributed the increase in inflation and fiscal risk to the worsening of the projection.

For this year, the BC expects 4.4% growth, below the 4.7% projected in the September document.

“Corroborating the less favorable evolution of activity, business and consumer confidence indicators, particularly relevant to understand activity over the current quarter, have retreated in recent months. Therefore, the result was lower than expected in the third quarter and the worsening in the forecasts for the fourth reduce the growth projection for 2021 and the statistical load for 2022”, stated BC.

“Agriculture weighs on the other side. As it fell in 2021, the contribution for 2022 rises and there is a perspective of better harvests in 2022. This helps the GDP and explains part of the difference between our data and Focus”, pointed out the Director of Policy Economics, Fabio Kanczuk.

He considers, however, that there is a relevant tightening in financial conditions, caused by factors such as the long part of the interest curve, exchange rate depreciation and increased country risk. “This implies lower growth, explains a good part of why we revised our GDP for 2022”, he said.

For monetary policy, Kanczuk considered that financial conditions have different effects in emerging countries and advanced economies. “In developed economies, tight conditions mean lower inflation. In Brazil and emerging markets, they are linked to fiscal risk,” he pointed out.

In his view, the scenario could even translate into higher inflation in these countries. “The implications for monetary policy [nos emergentes] are much more ambiguous, to say the least,” he pointed out.

For inflation, the Central Bank maintained the probability of 100% breach of the target ceiling defined by the CMN (National Monetary Council) of 3.75% for 2021, with a tolerance of 1.5 percentage points up and down. Thus, the indicator could not exceed 5.25%.

BC’s projection in the central scenario is 10.2%, almost double the maximum allowed.

For the autarchy, the inflation accumulated in 12 months should drop to 9.9% in February. The BC expects an increase of 1.18% in November and 0.65% in December. For January and February, the projection is for growth of 0.15% and 0.66%, respectively.

“The projected decline in inflation for the next quarter is justified by the expected substantial drop in fuel prices, especially in January. In this month, a sharp decline in airfare prices is also expected. For the other components, the projection is, in general, of persistence of inflationary pressures”, evaluates the BC.

For 2022, according to the report, the chance of inflation reaching the ceiling is 41%. The target for the year is 3.5%, with a tolerance of 1.5 percentage points (up to 5%). BC’s central projection is 4.7%.

In the previous report, the probability of exceeding the maximum limit was 17%. In the worst scenario simulated by the autarchy, prices could accelerate by up to 5.6% next year, 0.6 percentage point above the target ceiling defined by the CMN.

The BC says that inflation in 2021 was above expectations and spread to the following years via inertia (when the current number affects future data). There was also an increase in market expectations for the indicator.

In the report, the BC also increased the estimate of neutral interest used in its models, which went from 3% to 3.5% in real terms (discounted for inflation). The rate serves as a metric for the Selic level, which, above, becomes contractionary –or slows down the economy– and, below, it becomes expansionary, stimulating activity.

In addition, the exchange rate depreciation and the increase in the neutral interest rate justify the upward revision of BC’s projections for inflation, according to the report.

When asked about the cycle of high interest rates amid the economic slowdown and high unemployment, BC president Roberto Campos Neto reiterated that the autarchy’s commitment is to control inflation, and stated that this has positive effects on other indicators.

For him, the country still lives with a very recent inflationary memory.

“We understand that anchoring inflation is the most important element to stabilize long-term growth and the fiscal part. Yes, we will have an increase in interest rates with growth in the margin that is not very high, but we understand that this was done in a way to have credibility and transparency, this is the best remedy to maximize the ideal conditions for future growth,” he said.

Last week, the Copom raised the base rate again by 1.5 percentage points, to 9.25% per year. In the statement, the BC indicated a new high of the same magnitude for its next meeting, in February, to 10.75% per year.

The current cycle of hikes in the basic rate is the most aggressive since 2002, with sudden increases, and it is the one that will have the greatest difference between the initial and the final rate since the creation of the inflation targeting system, in 1999.

The BC also revised the projections for credit growth in 2021 and 2022. This year, the expectation of the autarchy is for growth of 14.6%, compared to 12.6% in the September report. For next year, the monetary authority expects a 9.4% increase in loans (compared to 8.5% in the previous document.

“This revision resulted from positive surprises in the last three months in the nominal balances of individuals and companies and the impact of the increase in inflation expected for the end of the year”, highlighted the report.

“Among loans to households with nonearmarked resources, credit card and non-payroll-deductible personal credit stand out. In credit aimed at individuals, mortgages at a high level continued to boost the balance”, pointed out the BC.

According to the text, rural credit also surprised due to the significant increase in concessions throughout the year, especially in lines linked to commodities and agricultural inputs.

“In credit to companies, in recent months, there has been a greater expansion of discount lines for receivables and revolving credit. As expected, the growth in the balance of credit directed to legal entities continues to show a relevant deceleration”, he pointed out.

In the report, BC adjusted the projection for external accounts. Compared to the last report, there was an increase in the expectation of a current account deficit for 2021, from US$21 billion (R$119.9 billion) to US$30 billion (R$171.3 billion).

“The revision mainly reflects the expectation of a lower balance of trade, with an increase in imports,” said the monetary authority.

The expected deficit for current transactions in 2022 also increased compared to the previous document, from US$14 billion (R$79.9 billion) to US$21 billion, due to the expectation of a lower trade balance.

“The deterioration in the expected value for exports reflects the recent deterioration in the prices of iron ore and oil”, justified the BC.

Direct investments in the country also had a worse projection. Now, the BC expects an inflow of US$ 52 billion in the modality in 2021 and of US$ 55 billion in 2022. Before, the BC estimated an inflow of US$ 55 billion and US$ 60 billion, respectively.