Strong growth for the time being, but…
Impelled by the increase of demand coming from net exports and income transfer programs, GDP in the first quarter of 2022 expanded by 1%, and various confidence indicators point to further growth in the second quarter. Although due to the carry-over, growth in 2022 should exceed our previous projection, of close to 1% growth, it is necessary to pay heed to the caveat of Olivier Blanchard that “economists need to avoid the error of limiting themselves to extrapolating the current behavior to the future.”
Unless, with the collaboration of Congress, the government finds a way to circumvent the restrictions on increased spending in an election year (last week there was talk of an emergency constitutional amendment to offset the effects of the Russia-Ukraine war), in the second half of the year the effects of the restrictive monetary policy will be increasingly felt. Since November 2021, the one-year ex ante real interest rate has been greater than 6%, with a rising trend. Despite the Central Bank’s indications that it will conclude its tightening movement with the Selic rate at 13.25% in the next COPOM meeting, our estimates are that with rate kept at that level during most of 2023, the inflation target will only be attained in 2024.
Besides the effects of the real interest rate through the aggregate demand channel, at some point in the second semester the effects should intensify through the credit channel, since according to the most recent data, household indebtedness has already exceeded the previous historic peak. Finally, uncertainties about global activity have raised doubts about the future path of commodity prices and the behavior of net exports. Despite strong growth in 2022, there is a high probability that GDP will start to contract at the beginning of 2023. At the end of this document we evaluate the monetary policy.
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