Credit Suisse raises the forecast for Brazilian GDP in 2022 from a decline of 0.5% to an increase of 0.2%

RIO DE JANEIRO, BRAZIL – Credit Suisse raised its forecasts for Brazilian GDP in 2022 from a decline of 0.5% to a slight increase of 0.2% this year, while maintaining its expectations for inflation and interest rates.

According to economists Solange Srour, Lucas Vilela and Rafael Castilho, signatories to the report, the government has taken several measures to stimulate short-term economic growth, such as a 25% cut in the industrial products tax (IPI) and the release of FGTS withdrawals amounting to 0.4% of GDP.

For 2023, the GDP growth projection of 2.1% (due to the expected slowdown in the monetary cycle) was maintained.

The experts point out that economic indicators in the first months of the year were slightly better than expected. Thus, they revised the projection for domestic demand, especially family consumption.

The higher terms of trade will have little impact on GDP growth in 2022, as inflation and interest rates can offset the higher exports. On the other hand, the higher terms of trade will have a positive impact on consumption from 2023 onward, which could boost investment and improve public budgets.

In terms of inflation, the Swiss bank’s economists expect an increase of 7.8% in 2022 and 4.3% in 2023, compared to the Brazilian central bank’s targets of 3.5% and 3.25%, respectively.

“The shocks to food and fuel caused by the Ukraine conflict have worsened Brazil’s already weak inflation outlook, which has been pressured by inertia, input costs (e.g., electricity), and prices frozen during the pandemic (e.g., for education courses and health care),” the economists said.

Short- and medium-term inflation expectations have risen sharply in recent months as inflation continues to surprise. With this in mind, economists expect the interest rate to rise 100 basis points in May, 75 basis points in June, and 50 basis points in August to 14%, and remain at this level through the end of the year.

Economists believe the central bank will need to continue raising rates after May, as models suggest higher rates are needed to lower inflation expectations ahead of the 2023 and 2024 targets.

“At the last [Copom] meeting, the monetary authority strongly suggested that a final 100 basis point hike in May (to 12.75%) would be sufficient to bring inflation down to target by 2023, but we believe it will likely need to revise its inflation forecasts as it is likely to continue to surprise to the upside and move expectations further away from the target,” they assess.

In the coming months, the focus will be on the presidential election. From now on, they estimate, polls are likely to become a more reliable predictor of the contest to be held in October, as potential candidates begin campaigning, the percentage of undecided voters is expected to decline, and political coalitions begin to form in the states.

Current presidential polls show a polarization of the race between current President Jair Bolsonaro and former President Lula.

According to economists, it is unlikely that the main candidates will give a clear picture of their economic team and policies before the second round.

Nevertheless, they believe that the main candidates will push for important economic reforms in the first year of the new government, especially fiscal consolidation.

Without an improvement in the primary balance and a redesign of the fiscal framework – to reinvigorate economic actors’ expectations of fiscal sustainability and lower interest rates – the economy is likely to perform poorly, which will reduce the president’s approval ratings and his ability to govern, Credit stresses. In this regard, the bank believes it is encouraging that the main presidential candidates understand the importance of these reforms. Moreover, previous administrations have obtained congressional approval for unpopular reforms in their first year in office.