Lula takes over with a weak economy, uncertainty about inflation and a smaller job recovery

An economic scenario that analysts tend to call challenging awaits the new government of Luiz Inácio Lula da Silva (PT) in 2023.

For the next year, projections indicate a lower growth of the Brazilian GDP (Gross Domestic Product), which tends to slow down due to a combination of factors.

High interest rates, loss of pace in the world economy, the end of the reopening stimulus after the pandemic restrictions and household debt are part of that list.

With the possible brake on the GDP, the expectation is for a lukewarm performance for the job market, while forecasts point to inflation still under pressure in the country.

Of course, this scenario could change —for better or worse— as a result of the next government’s decisions. For now, analysts are waiting for more signals about Lula’s economic policy and his guidelines in the fiscal area.

The fear of increased spending during the PT administration has already caused noise in the financial market and remains a cause for alarm for part of economists.

Another point of attention is the external scenario, especially in relation to the course of monetary policy in the US.

“The scenario for 2023 is one of lower growth than this year”, says Sergio Vale, chief economist at the consultancy MB Associados. MB projects an increase of 0.5% for next year’s GDP, after forecasting a 3% increase in 2022.

The specialist mentions that agriculture tends to harvest an “excellent harvest” in 2023, but the field alone should not guarantee a more expressive advance for economic activity.

With that, the unemployment rate should be “more stabilized”, according to the economist, after the downward cycle that took the indicator to 8.3% in the quarter until October, the most recent with available data.

“What brings the unemployment rate down is economic growth. So it’s likely to be around 8% or 9%.”

Economist Luca Mercadante, from Rio Bravo Investimentos, projects an unemployment rate of between 9% and 10% next year, with a “gradual” and “non-abrupt” rise.

Mercadante also points out that the lagged effect of high interest rates should curb economic activity in 2023.

Rio Bravo estimates an increase of 0.7% for GDP next year, but does not rule out an increase of up to 1%, after a forecast increase of 3.1% in 2022.

“Economic activity will grow, but much less than this year, mainly due to the effect of monetary policy”, he says.

“There are other points that deserve to be highlighted, such as the good performance of agriculture. The grain harvest will be very good next year. We must also have some resilience in the labor market. impact on the activity”, he says.

C6 Bank predicts a lower result for GDP in 2023. The bank’s estimate is of stagnation in economic activity, with the indicator marking 0%, after an increase of 2.8% in 2022.

“We already see signs of deceleration”, points out economist Claudia Moreno, from C6 Bank.

She assesses that the likely loss of breath can be attributed to at least three factors: the end of the process of reopening the economy, the global slowdown and the impact of high interest rates.

C6 Bank also projects that Brazil’s official inflation, measured by the IPCA (National Consumer Price Index), will close next year at 5.9%, after the effects of tax cuts that should take the indicator to 5.6 % in 2022.

Thus, 2023 would mark the third consecutive year in which the inflation target was exceeded in the country. “It’s a picture of still pressured prices”, says Moreno.

Rio Bravo, in turn, forecasts IPCA of 5.2% in 2023, after a 6% advance estimated for 2022. MB Associados projects inflation of 5.3% next year, after an increase of 6% in 2022.

To cool down the economy and try to contain the increase in prices in the country, the BC (Central Bank) raised basic interest rates (Selic) to 13.75% per year. Analysts estimate that the rate should only start to fall from mid-2023.

What can delay the start of the cuts, says Sergio Vale, from MB, is the fiscal risk. “The key point is to understand what will be the fiscal rule to be created in the first half of next year.”

José Pena, chief economist at Porto Asset Management, has a more optimistic growth projection for 2023, of 1%, but says that the number tends to be revised downwards soon. This possible revision is due to a greater level of uncertainty, in the internal and external scenario, in relation to what was expected one or two months ago.

The current scenario is one of risk of rising inflation expectations, with indications of growth in public spending to sustain a demand that is still relatively strong, in the midst of low idleness, which postpones the scenario of interest rate cuts.

What may help to keep alive the expectation of a reduction in the basic Selic rate in the not so distant future would be a reversal of the cycle of high interest rates abroad, especially in the US, and the continuity of the process of normalization of the global supply chains.

“If a prospect begins to materialize that the Fed [banco central dos EUA] is about to end its bull cycle, this will help us. If the Fed surprises with a higher hike, this will punish risky assets around the world even more, Brazilians among them”, says Pena.