The Tailwind of the International Economy

BRAZIL ECONOMICS - Report 24 May 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

We have Despite the risk of a third wave of contagion, the Brazilian economy should grow by 4% or more in 2021. Since the vaccination program is slow and intermittent, and the government has never imposed a lockdown, most people continue to work, reducing the effects of the pandemic on economic activity while also reducing the decline of the daily death toll (or even increasing it). The economy is also being boosted by a tailwind from abroad, caused by two forces. The most important is a new cycle of rising commodity prices, driven largely by Chinese growth, which should reach 8.4% in 2021. The second is the strong monetary expansion by the Fed, which through the appreciation of the great majority of currencies (or the weakening of the dollar) has led to a cycle of low interest rates around the world. Our objective in this report is to demonstrate that: a) although strong, and with some persistence, the present situation cannot be called a new commodity price “super cycle”, comparable to that of 2002-2011; and b) besides the risk of generating asset price bubbles, the excessive monetary stimulus dose by the Fed, combined with a strongly expansionist fiscal policy, has raised the risk of inflation and higher interest rates in the United States, causing the same effect internationally.

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