Fiscal Stimuli, Monetary Accommodation and GDP Growth

BRAZIL ECONOMICS - Forecast 18 Dec 2023 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

The strong GDP growth in 2023, of 3.1%, is much more a consequence of actual GDP, spurred by aggregate demand, than by growth of potential GDP. No matter how attractive they are, the narratives about increased productivity have no empirical support. Contrary to government and household consumption, which through the multiplier effect expand aggregate demand, the last few quarters have witnessed a decline of investments, both in the production of capital goods and in civil construction.

Although the new fiscal framework has managed to avoid explosive growth of the public debt, it has not prevented growth of primary spending in real terms or the generation of primary deficits. Thus, the fiscal policy is still expansionary, and the debt has been growing persistently. One of the main channels through which public spending has been occurring is income transfers, which in real terms have grown significantly in relation to the average before the pandemic. There are no perspectives for stabilization, much less reduction, of expenditures in real terms, so fiscal policy will continue to be expansionary.

Although the Central Bank has never declared it is pursuing inflation higher than the central target, by clearly expressing forward guidance of cuts in the SELIC rate of 50 basis points per COPOM meeting, it has managed to invert the yield curve, accentuating the decline of the nominal 12-month rate. Based on this forward guidance it also has revealed that its reaction curve gives great weight to the GDP gap and is seeking to avoid an excessive widening. This is the natural reaction of a central bank that, despite having independence, is not indifferent to the pressures imposed by the government. Although the result will be inflation above the central target and growth of actual GDP higher than the consensus projections, we do not foresee risks of a weakening of the exchange rate that could pose greater problems for the Central Bank.

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