2020 was a year of recession and illness. In 2021, what caught the attention was inflation. About 10%, something we hadn’t seen in a long time. And in 2022? What will be the highlight of this coming year? We don’t have a crystal ball, but guessing (with some basis) doesn’t hurt, because we believe that 2022 will be the year of low growth and electoral tension.
And the omicron? On this topic, the unknown is so huge that any opinion involves 88% of guessing. In any case, in our base-case scenario, it gets in the way, but it doesn’t knock it down like its great-grandmother, the Covid of 2020. We have the vaccine, we know better how to deal with the disease, we adapt as much as possible to the virtual world, etc. But again, the terrain here is too swampy. Our scenario has a good dose of fans.
Inflation was the boogeyman of 2021. Worldwide, or almost, it doubled its level (or more!). In Brazil, it went from 4.5% to 10%. The main reason was the tremendous adverse supply shock that pushed input prices to the moon and brought unprecedented paralysis in production chains. This shock, it seems, is already starting to wear off, but its impacts tend to be persistent. Inflation will certainly decline in 2022, but by how much is likely to vary greatly from country to country. Brazil reversed fiscal and monetary expansion—perhaps it raised interest rates too much. We were the country that tightened monetary policy the most in 2021 and, despite the confusion about the ceiling, we adjusted our public accounts well. That’s why we believe that inflation will decline significantly in 2022. In the United States, for example, monetary policy is quite behind or behind the curve, as economists say. The full index is close to 7% and the central bank interest is still high at zero!
Let’s be clear, we don’t see much of a problem with high inflation for a year or two. Even more so in difficult times like the present. Our criticism is about the inertia of the US central bank in the face of the phenomenon. And in global terms, it would be much better to raise interest rates gradually than to give a hobby horse, with a sudden acceleration of monetary tightening, in the middle of the year. Historical data give a clear message: when the US interest rate rises fast, below the Rio Grande the bug catches on.
In Terra Papagalis, inflation was an important factor in the fiscal adjustment. It helped to reduce the real salary of the civil service, which accounts for approximately 5% of GDP. But it must – and will – fall. The only problem is that the almost inevitable counterpart of the interest rate hike that we saw in 2021 (and we will continue to see it in 2022, it seems) is a significant cyclical slowdown in the economy. Today, most growth forecasts for Brazilian GDP are around 1% or less. It is very little and will generate tension and pressure, as is often the case, for populist measures (even more so in an election year). What’s more, the combination of rising interest rates and falling growth greatly worsens the dynamics of public debt, which is already one of the highest among emerging markets. In conclusion, even if the onomicron is not devastating for the world economy, the year that is starting here does not seem auspicious.
Happy old year everyone!
Mauro Rodrigues (professor of economics at USP and author of the book “Under the magnifying glass of the economist”) and the team at Por Quê?
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
