Opinion – Vinicius Torres Freire: USA and China will catch colds or flu and Brazil has low immunity

The US economy shrank in the first quarter of 2022. But it remains overheated, with productive investment and private consumption on the rise.

How is it possible? More on that later. More relevant is whether it will be possible to contain inflation in the US without a strong slowdown, which could even lead to recession from 2023 onwards.

The Chinese economy grew more than expected in the first quarter of 2022. But March and April were weaker months. There are indications that Chinese GDP will grow less than expected this year.

GDP is a tedious subject, yes. But what happens in the US and China will influence the pace of the economy and prices here as well, for starters.

In a report late last week, economists at Goldman Sachs discussed the risk that inflation control could lead the US into recession.

The more inflation expectations get out of control, the greater the risk. If the global shortage of materials for industry and the war continue to trigger price increases, the greater the risk of “unanchoring” expectations.

The longer the relative tightness of the labor market (the lack of workers willing to work for a certain wage) continues, the greater the risk of a “wage-price spiral”. That is, more inflation leads to more salary increases in addition to productivity gains, which causes a new round of price adjustments, etc.

It is uncertain whether such pressures, expectations and wages will continue, for how long and at what size, say the folks at Goldman Sachs. Even with projections that the famine caused by plague and war tends to decrease, it would also be necessary to reduce the upward pressure coming from wages. This would require a slowdown in GDP growth to between 1% and 1.5% per year. In the 16 years from 2004 to 2019 (with the Great Recession in between), the US economy grew by 1.2% per year.

It is not, therefore, a disaster, but the pace would drop significantly compared to 2021 and less than half of the growth forecast for 2022 by the IMF (3%). Moreover, it is not always possible to reduce the pace in a controlled way.

A coordinated, measured and controlled fall in GDP and inflation, plus the Chinese slowdown, would bring down growth and prices around the world.

For now, it is the most peaceful scenario for the exit from these acute crises, plague and war. Much better than a recession or, even more, than a financial crisis caused by an interest rate shock in the US. But Brazil would have one more difficulty getting out of the depression.

The US GDP shrank 0.4% compared to the final quarter of 2021. In addition to being unexpected, it was a number defined by some unusual events.

One way to calculate GDP is to consider what happens to large groups of expenditure: private consumption, government consumption, investment in increasing productive capacity (houses, machines, etc.), and the difference between imports and exports, apart from an adjustment of inventories (what was produced and “kept”).

US GDP fell because imports (purchases of goods and services from other countries) were much greater than exports. It may be a sign of an overheated economy or a temporary difficulty in supplying abroad (because of the problems caused by the epidemic). From what American analysts say, there was also a lot of delayed imports arriving in the first quarter. Companies also saw their stocks empty (perhaps also due to lack of inputs).

It’s still not a sign of recession, not by a long shot. But there will be a slowdown. It remains to be seen whether the change of pace will take a bad turn or not.