February of this year was marked by the invasion of Ukraine by Russia and the imposition of financial and trade sanctions on the Russian economy. It is also important to note that countries historically aligned with Russia, such as China, have also not explicitly supported the invasion, showing themselves to be prone to a diplomatic solution to end this conflict. This stance intensifies Russian isolation and its associated commercial and financial isolation from the global economy.
From an economic point of view, we understand that this shutdown represents a negative supply shock, by decelerating production and accelerating world inflation, until then expected to begin to decrease in April, from the normalization of the effects of Covid-19 on supply chains. world production. How do we expect this shock to be reflected in terms of economic activity and inflation in Brazil?
In terms of direction, naturally, we expect GDP (Gross Domestic Product) to grow less than expected. Estimates prepared by the ECB (European Central Bank) point to a possible impact of a fall in the euro zone of up to 1.0%. The Brazilian economy is not dependent on Russia, with only 0.6% of exports and 2.6% of total imports coming from the country ruled by Vladimir Putin. But we are talking about a new chapter of globalization, with relevant impacts on the supply of fertilizers, food and energy commodities, which may accentuate the economic slowdown already expected, mainly due to high real interest rates.
Recently, the IBGE announced that, in 2021, the GDP growth rate grew 4.6% compared to 2020. The decomposition of this growth mainly reflects the resumption of services, which showed a recovery of 4.7% in 2021, but also the industry, which grew 4.5% compared to 2021. It negatively surprised agriculture, falling 0.2% compared to 2020, due to the poor performance of some crops (sugarcane, corn and coffee) and livestock (cattle and milk), impacted by adverse weather conditions.
On the demand side, attention is drawn to the investment weight of 19.2% of GDP, above the rate observed in 2020 (16.6% of GDP) and also the average rate observed in the period 2016-2019 (15, 2% of GDP). Despite good growth figures and clarity about the negative impact of the war on economic activity in Brazil, there is great uncertainty about Brazilian growth.
Indeed, the recent dispersion of projections of the growth rate of economic activity throughout the pandemic illustrates the current challenge, even before the geopolitical conflict. Thus, in the case of another negative supply shock, subsequent to the one experienced by Covid-19, we attribute a downside risk to our growth forecast of 0.5% per year in 2022. Prices still under pressure reinforce our estimate of a new 12-month inflation peak in April, reaching 10.85%. From then on, we expect disinflation, reaching 6% a year in December, and could reach 6.5% if the current price level is a persistent shock.
This inflation becomes even more challenging for the Central Bank of Brazil, if the government or the National Congress responds to a probable prolongation of the war with more fiscal imbalance, with measures of temporary disinflationary impact (outside the public spending ceiling) and, therefore, with effects on the de-anchoring of inflation expectations of the years with greater weight in the relevant horizon of monetary policy.
Fiscal responsibility is critical to the continuation of the recent appreciation of the real. This could help offset the negative effects of the war in Eastern Europe. It will not be with more fiscal imbalance that the purchasing power of the poorest will be recovered.
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