Brazilian Economy exceeds forecasts, retraction may be delayed to 2023

RIO DE JANEIRO, BRAZIL – After positive surprises with activity in the year’s first half, the Brazilian economy enters the second half of 2022 under low visibility.

Since the data from the beginning of the year started coming in better than expected, analysts expected that starting in July, economic activity would begin to feel the monetary tightening in a more relevant way, slowing down.

This view remains, but with the strong recovery in the labor market and the government’s forecast of new fiscal stimulus, projections of GDP contraction at the margin were pushed from the third to the fourth quarter or even to 2023.

The turn of 2021 to 2022 was marked by the generalized drop in projections for GDP this year, notes Santander, recalling that the Focus median reached the 0.25% valley on January 20.

The perception was that real interest rates had entered the restrictive field, imposing tepid activity in the first half, still sustained by the recovery of services and records in agriculture, but contractions from then on.

Since then, figures for the agricultural sector have been revised downwards, but in services, even though the omicron wave has delayed consolidation, expectations have even been exceeded.

The sector’s contribution to GDP in the first half of the year is strong, especially in those segments most dependent on the normalization of mobility.

But even areas related to goods, such as industry and retail sales, brought positive surprises, economists note.

For Santander, the continued increase in household consumption has reflected spending of savings accumulated during the worst moments of the health crisis, the expansion of the real wage mass – in the wake of the recovery of the labor market and the increase in government transfers – and the support for the concession of credit.

Santander projects 0.2% growth for second-quarter GDP, after 1% in the first quarter, but the bank’s monitor indicates that this number is higher, around 0.5%, “which implies upside risks to our annual projection,” say economists Lucas Maynard and Gabriel Couto.

The bank, which was already more optimistic when estimating 0.7% for the GDP in 2022, now expects 1.2%.

Débora Nogueira, the chief economist at Tenax Capital, recently adjusted her projection for the GDP in the second quarter from 0.4% to 0.7% because she says she still “sees strong data at the tip”.

For her, the April labor market numbers, when the quarterly unemployment rate dropped to 10.5% (now at 9.8%), were “a significant watershed.

In addition, she mentions the resilience of credit, especially to individuals, and the fiscal stimulus of the period.

“The question was how the shock, positive for Brazil, of the terms of trade [relation between export and import prices] was going to impact the economy, how this wealth would spread. It is being done via taxation,” she says.

The release of FGTS withdrawals alone, for example, added 0.3 percentage points to his projection for the year’s GDP, now at 2.2%.

The increase in disposable income in the second quarter also made BRCG Consultoria raise its GDP forecast for the period and the year to 1.1%. But the second semester “is complicated,” says Livio Ribeiro, partner at BRCG.

The consumption of goods and services should decelerate in the year’s second half, while the wage mass should “walk sideways,” says Santander.

“If, on the one hand, employment performed better than we expected, on the other, inflationary surprises eroded real income even more than our scenario initially considered,” Maynard and Couto point out.

What can give support to the economy, they say, are less cyclical sectors linked to commodities and longer cycle sectors, in which the rise in interest rates takes longer to hit, such as construction.

Santander estimated that the upward shock in commodity prices due to the war in Ukraine pushed the risk of contraction of the Brazilian economy from the third to the fourth quarter.

The bank’s respective projections are for flat GDP and then a contraction of 0.4%, versus the previous estimate of two 0.3% drops.

Tenax does not expect GDP contraction in any quarter of the second half of the year but highs of 0.3%.

“Before, we had the fourth quarter negative. Now, we think that, with the fiscal environment and the load on the labor market, it will no longer work,” says Nogueira.

Even if the GDP slows down in the second semester and the creation of job openings follows this movement, the unemployment rate will probably continue to fall in the period, says Marcelo Toledo, chief economist at Bradesco Asset Management (Bram).

In addition, according to him, the fiscal impulses under discussion at the moment – such as tax cuts and an increase in Brazil Aid – naturally lead to an upward revision of activity in the second half.

“You have to wait for the final outcome, but the ICMS reduction represents an increase in disposable income,” he exemplifies.

Bram had projections of quarterly GDP closer to stability in the year’s second half; now, slight growth is possible, according to Toledo. “We see in this projection of 1.9% for 2022 still an upward bias,” he says.

On the other hand, in the second half of the year, the “post-pandemic” reopening effects on the activity should already be practically exhausted, while the world, which had a positive contribution to Brazil’s growth in the first half, should operate in neutrality, Toledo points out.

Regarding monetary policy, his reading of the high-frequency data indicates that the traditional models will continue to overestimate their effect on activity. “It will have an effect, but I think the most visible effect will be at the beginning of next year,” he affirms.

With information from Valor Econômico