The Deceleration of GDP And the Possible Reaction of the Government
If the decline of GDP in the fourth quarter of 2022 had been a fleeting event, followed by recovery, there would be no worry about the government’s reaction. But this was not a temporary deceleration, but rather a persistent one. Despite the expansionary fiscal policy, monetary policy has been in strongly restrictive territory, and should remain this way throughout 2023.
Although with a high degree of tolerance, clearly demonstrated by the elongation of the horizon to reach the target, the government has sent strong signals of objection to the policy of the Central Bank, which has clearly expressed it intends to carry out its mandate to control inflation. Since this will require widening the GDP gap, the cost of meeting the target will be slower economic growth, a situation the government considers unacceptable. For this reason, the Central Bank is facing a hail of attacks seeking to convince it to lower the interest rate, since “inflation is not driven by demand”, a new motto coined by allies of the PT. In reality, the fiscal-monetary conflict of 2022 is carrying over to the Lula administration, with no solution in sight.
We don’t know what the new fiscal framework will be, but in light of a public debt that is too large for an emerging country (although composed of local currency), any rule that does not address the need to cut spending (requiring administrative reforms) to generate primary surpluses will not be credible. Our base scenario is that the fiscal-monetary conflict, currently manifested in a conflict between the Central Bank and the Ministries of Economy and Planning, will continue without solution, hindering Brazil’s economic performance.
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