Opinion – Solange Srour: Pandemic, inflation, war, lockdown in China and elections: perfect storm?

Just when we thought we had emerged from one of the greatest economic challenges in history, the prospects for the world are once again cloudy. With the war in Ukraine, the increase in global inflation and the return of lockdowns in China, the difficulties to be faced in the coming years tend to be conjunctural and structural.

In Brazil, despite a higher expectation for this year’s GDP, forecasts for 2023 were revised downwards, with the disinflation process increasingly costly. Meanwhile, the polarized electoral debate has not yet brought discussion of proposals to the country. We are unprepared to face the restrictions of the most adverse external scenario.

The consequences of the war in Ukraine go far beyond the reduction in the supply of commodities and the risk of stagflation. The “Washington Consensus”, based on globalization and free trade as paths to prosperity and convergence between advanced and emerging economies, is a thing of the past.

If the pandemic has exacerbated concerns about national self-sufficiency, the war has opened up limited space for neutrality in the face of greater geopolitical tension between the US and Europe and China and Russia. We do not know what the “new world order” will be, but we will hardly be benefited as before by the integration between economies.

On the other hand, the greater persistence of global inflation increases the chance of more restrictive interest rates, reducing abundant international liquidity and global growth. More than the economic issue, the acceleration of inflation can bring political instability.

It is worth remembering that the Arab Spring was, to a large extent, caused by the increase in food prices.

With more than 275 million people facing acute food insecurity in the world, multilateral organizations have expressed concerns about the substantial increase in poverty and its social impacts. Bringing inflation to significantly lower levels will be an arduous task, as its fight in many cases leads to an increase in unemployment.

To complete the picture, Chinese growth has been affected by the “zero-Covid” policy, which has reduced mobility by 35% of the country’s GDP, causing another breakdown in production chains, food shortages and increased social tensions.

Even if the Chinese authorities guarantee investment stimulus and retreat in the ongoing regulatory tightening, the growth model based on the continuous expansion of domestic supply at a time when global demand slows can hardly be sustained without the emergence of new “bubbles”.

So far, the favorable external scenario has led to a strong expansion of revenue with the fiscal result, which may remain positive for two consecutive years. While economic activity has proved more resilient to interest rate hikes, employment has already recovered to pre-pandemic levels.

We settle for a “better picture” without thinking about changing external winds. From the point of view of the macroeconomic agenda, no major advances were made after the approval of the pension reform. We backtracked.

To permanently triple Bolsa Família, we changed the cap rule without discussing superior alternatives in reducing poverty with less expenditure. At the same time, the discourse of permanent revenue gains threatens future primary results with tax exemptions carried out without a sustainable design.

The roof is threatened from all sides. There is now a discussion about taking away the Auxílio Família and public investments from the expenses under its control. Without an effective limit on total expenditure, our public debt will have an explosive trajectory. The huge uncertainty about which fiscal regime will prevail from 2023 puts pressure on inflation expectations, the exchange rate and interest rates.

With just a few months to go before the election, we are far from the important debate on which economic and social agenda Brazil will pursue. The only certainty is that the more difficult the external scenario, the greater the need to quickly pursue the adjustments that were left behind.