Declining World Growth and The Reflections in Brazil

BRAZIL ECONOMICS - Report 17 Oct 2022 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

More important than the magnitude of the decline in the IMF’s new projections for global growth in 2023 is the warning, loud and clear, that “although many countries may not be in a recession, they will feel as if they were in recession”. Not since the crisis of 2008 has there been such generalized deceleration of world growth. Although with other transmission mechanisms, the current situation has similarities with what happened during the fixed exchange rate regime, when restrictive monetary policy in the United States metamorphosed into globally restrictive monetary policy.

This is now happening when most countries’ economies remain fragile due to the excessive monetary and fiscal stimuli used in the attempt to minimize the economic costs of the pandemic. The greatest costs are impending in the Euro Zone, where the ECB will have to raise the interest rate even though Germany and Italy will face a recession (they are also the countries most affected by the higher energy cost resulting from the Russian invasion of Ukraine). With regard to the emerging countries, not only are their currencies weakening due to the appreciation of the dollar caused by the Fed’s tighter monetary policy, but they are also subject to the aggravation produced by the “flight to safety”, which will tend to intensify.

As if all these problems were not enough, observers around the world were surprised by the decision announced by the new UK prime minister to reduce taxes on the rich to stimulate economic activity, ignoring that this will oblige the BoE to raise the interest rate to counteract the already intense weakening of the pound. The first act of this drama ended with the resignation of the finance minister, leaving a good dose of uncertainty about the future of the new government, along with a crisis involving pension funds, with a dimension that is not yet clear. This is the picture of the global economy that Brazil will have to face in 2023, not to mention the big domestic problems, especially regarding fiscal policy.

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