RIO DE JANEIRO, BRAZIL – J.P. Morgan revised downward its projections for the growth of the Brazilian Gross Domestic Product (GDP) from 3.2% to 2.9% in 2021 and from 2.4% to 2.2% in 2022. According to the bank’s team, the impact on business activity of the second wave of the Covid-19 in the country should occur later, but with more force than previously projected.
“We expected the rise in cases and deaths to impact the economy, as Covid-19 concerns and new containment measures reduce confidence and restrict activity for some time. But as ICU occupancy rates reached full capacity across the country during March and early April, our projections were probably underestimating the extent of this second wave,” Cassiana Fernandez and Vinicius Moreira write in a report.
The economists’ earlier scenario was of business activity contraction, mainly in the first quarter, with recovery throughout the year. “However, mobility remained high during the first two months of the year, which probably helped the economy grow more robustly in the first quarter, but also prolonged the spread of the virus. It now appears that most of the negative impact should come in the second quarter, with a larger impact to GDP growth,” they say.
Quarters
J.P. Morgan now projects a 0.8% drop in annualized seasonally adjusted GDP for the first quarter, down from a previous forecast of -5.8%. In addition, it downgraded its estimate for the second quarter from a 1.6% expansion to a 6% drop, always on a seasonally annualized basis.
In the second half of the year, with expectations of an advance in vaccination, but also high uncertainty and the approaching election year, the team says it expects “a slight recovery with an average GDP growth of 3.5%.” Based on a slower transition from 2021 to 2022 and tighter financial conditions, J.P. Morgan also lowered its GDP projection for 2022 by two tenths.
SELIC
Moreover, it considered that the Central Bank is likely to continue raising SELIC, the basic interest rate up to 5.5%. “While vaccine implementation and global recovery should help, we believe the cycle between pandemic and policy management risk is tightening financial conditions. This likely further lowers the potential for a stronger and more sustainable recovery.”
In another report, the bank had discussed the factors that are important to pandemic dynamics, such as mobility and the pace of vaccination, and the potential third wave if vaccination implementation did not accelerate and/or if mobility increased earlier than recommended. “Both factors seem to be happening at this point,” the economists note.
They say they believe that for now this would delay recovery to some extent, “but would not lead to another GDP drop in the second half of the year, as we consider that the vaccination rollout for seniors is progressing and hospitalizations in the third wave should be lower, limiting the impact on confidence,” they say.
Fernandez and Moreira acknowledge, however, that the unfolding of the pandemic is “highly uncertain” and this is “a major risk” to the expected recovery process, as health authorities in other countries have had to implement containment measures during new waves of cases even if vaccination had progressed significantly.
In addition, they say it is unclear how policymakers would react, especially on the fiscal aspect, to this potential third wave, which could contribute to tighter financial conditions due to higher financial risk. “Another source of uncertainty is the potential development of new variants that could challenge the efficacy of vaccination,” they add.
Inflation
Despite the lower growth, forecasts for inflation measured by the National Broad Consumer Price Index (IPCA) were also revised. The projection rose from 4.5% to 5% this year, due to the increase in supply prices and inflationary inertia. The increase was not higher because J.P. Morgan included the approval of the bill freezing medicine prices in its projection, which cut 0.30 percentage points from the estimate.
For 2022, the IPCA projection was revised from 3.5% to 3.7%, due to “suppressed inflation.”
“If the decision to keep drug prices frozen this year is confirmed, which we assume in our base case scenario, it will likely require some compensation next year.” In addition, other controlled prices, such as bus fares, are likely to remain atypically low this year, despite the increase in fuel prices, they point out.
Source: Valor