The Projections of the IMF for the World and Brazil

BRAZIL ECONOMICS - Report 25 Apr 2022 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

The last World Economic Outlook confirmed what was expected, a weaker growth projection (in relation to that of January) for the world economy in 2022. It is increasingly clear that additional deceleration is in store for the United States due to a more intense shift of monetary policy to restrictive territory. Although the IMF still projects growth in the USA in 2023, the expectation has increased that the Fed will have a hard time orchestrating the desired soft landing.

In the Euro Zone, projections for deceleration have different intensities among the countries, being greater in those more dependent on Russian gas, such as Germany and Italy, in comparison with those less dependent, like France. The worst projections apply to the emerging countries. Although this result is strongly affected by the envisioned contraction of Russian GDP, the evidence now indicates it will be generalized. The emerging countries were already facing the challenge of fighting inflation, and this has become more difficult due to the shock in the prices of oil and food commodities provoked by the Russian war against Ukraine.

And a new wave of Covid contagion in China has triggered lockdowns in Shenzhen and Shanghai, so despite the stimulus package recently announced by the government, deceleration is now inevitable. Special attention should be paid to the Brazilian case. Instead of the growth of 0.3% (in the January projection), the prognosis now is for growth in 2022 of 0.8%. This revision is not a surprise (in Brazil there are projections for growth of about 1%). After all, the historic growth rate of Brazilian GDP has a significant positive correlation with the growth of commodity prices, and as we have projected in previous reports, the trade surplus this year should be sufficient to lead to a current account surplus.

Unfortunately, although the increase of commodity prices will accentuate growth in 2022, it will increase inflation even more, reinforcing the need for the Central Bank to keep the SELIC rate higher for a longer period. With monetary policy solidly in restrictive territory, and considering the lags of monetary policy, although GDP this year might grow by 0.8% (or even a bit more), the radar screen indicates strong deceleration is in store for the end of the year, causing the Brazilian economy to enter 2023 in recession.

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