Projections for 2022: Stronger Growth and Higher Inflation
It is part of economists’ fate to periodically adjust their projections. In 2022, the Brazilian economy should grow by around 1%, surpassing the previous estimate of 0.7% from the last Focus report (04/29/2022). However, considering that at the end of 2021, the country’s income per capita was more than 8% below the figure before the start of the recession of 2014-16, and that the population has been growing at around 0.8% a year, there are no reasons to celebrate this result.
There are two causes underpinning the better performance: a) the strong growth of international commodity prices; and b) the stimulus to household consumption from the government’s income transfer programs. With regard to inflation, although the Central Bank will likely put monetary policy in even more restrictive territory than at present, it has decided on calibration by which inflation at the end of 2023 will still be above the central target. It has thus confirmed that its loss function gives high weight to deviations of current GDP in relation to its potential growth. The behavior of inflation will thus also be affected by the reversal of the exchange rate movement caused by the more intense strengthening of the dollar.
After appreciating for over a month, the Real has returned to the ballpark of R$5.00/US$, and all available empirical evidence indicates that Brazil’s exchange rate is sensitive not only to movements of the dollar, which should continue getting stronger, but also to changes in the fiscal risk perception. This last factor will tend to get worse with recognition that the improvement in the fiscal results in 2021 and 2022 is a temporary phenomenon, not corresponding to the fiscal fundamentals, which remain extremely fragile and bereft of perspectives for improvement.
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