Navigating with Instruments in a Dense Fog
When the government’s economic team is specialized in sending noise instead of signals generated by a good diagnosis, good results cannot be expected. For 2023, we expect GDP growth of 1%, a major deceleration with regard to the result in 2022, of 2.9%. This expansion will only be attained due to the excellent performance expected for agriculture, which thanks to its efficiency, strong external prices and favorable climate should grow by 7.2% in 2023.
Given the high inflation and strong unanchoring of expectations, derived from the Central Bank’s operating de facto with implicit inflation targets in 2023 and 2024 higher than the official targets, the SELIC rate will begin a slow decline in the latter part of the year, with two cuts of 25 basis points at the year’s last two COPOM meetings.
Although we do not believe the threat of a credit crunch looms, we cannot discard the possibility that the credit channel will accentuate the reduction of economic activity due to the combination of high household indebtedness, increased spreads on bank credit to businesses and very high real interest rates for capital market intermediation. However, in this case, inflation will also decline, permitting an earlier start of the easing cycle. All the same, since the expectations are severely unanchored, the pace of the successive declines should be slow, of 25 basis points per meeting.
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