November 28, 2022
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What will be the effects on the Brazilian economy?

Rising inflation and recession in the US. At a time when growth forecasts for our economy are increasing and inflation forecasts are decreasing in 2022, problems in the world’s largest economy could have adverse effects on Brazil.

Analysts predict difficulties in countering inflation, given the real’s tendency to depreciate against the dollar and the possibility of capital outflows from Brazil.

Fabio Astraskas, CEO of Seegan Consultoria, points out that the impact could be significant in Brazil, which has long lived with high inflation. Since October, the annual rate has been higher than 10%.

“Also with Regression is shown in IPCA-15, it would be foolish to predict a sharp fall in prices. “Inflation in the country may come down gradually, including deflation in July, but the complex situation here and globally does not warrant optimistic forecasts,” he says.

US raises interest rates to control inflation

Concerns about high U.S. inflation, which hit 9.1% in the 12 months to June, the highest since December 1981, led the FOMC (Brazilian Copom Equivalents) to The US raised interest rates for the fourth time in a row by 0.75 percent. It went from 2.25% to 2.50% per annum.

A rise in interest rates in the US, amid international turmoil and investor risk aversion, favors buying safe-haven assets such as US Treasuries and depreciates other currencies.

This makes it difficult for funds to enter high-risk countries such as Brazil. According to B3, in the month up to the 25th, just over R$ 400 million in resources came in from foreign investors.

Liquidity in the market is low. “This means less money looking for income in the world. Less capital. With higher interest rates there, investors are thinking less about investing here or in other countries where the risk is higher,” analysts at Ricoh Investimentos point out.

Even corporate transactions in Brazil may be affected by reduced liquidity in the global economy. “It helps stop business growth,” says Alexandre Pirantoni, director of corporate finance at Kroll Consultancy.

US GDP is also a cause for concern

Another concern for the Brazilian economy comes with a slowdown in economic activity in the United States. This Thursday, the Bureau of Economic Analysis (BEA) released The first preview of second-quarter gross domestic product, which showed a 0.9% annual decline, Second withdrawal in a row. This has plunged the country into technological stagnation.

The slowdown is predicted by the International Monetary Fund (IMF), which this week cut growth expectations for the world’s largest economy in 2022 and 2023. Year, now projecting 2.3%. The estimate for next year is down from 2.3% to 1.0%.

The state of the US economy worries the Brazilian export sector, precisely at a time when sales there are increasing. In the first half, 17.63 billion US dollars were exported, an increase of 31.85% over the same period in 2021. According to the Secretary of State for Foreign Trade (Secex), this is the best performance since the start of the historic series in 1997.

“It’s the world’s largest economy and Brazil’s second largest trading partner,” says Rachel de Sa, head of economics at Ricoh Investimentos.

In this context, he warns, with high inflation and rising interest rates worldwide, the probability of a global recession is strengthening, bringing volatility to markets around the world and increasing the chances of contagion in Brazil.

At the same time, according to FxPro’s senior analyst Alex Kupcikevich, it forces the Federal Reserve (the US central bank) to reduce the pace of interest rate hikes. He points out that the pullback in the US economy is not the result of monetary tightening, but a drop in public spending as a result of the end of Covid-related programs. The effects of higher interest rates should be felt in the US in six months.

Brazil’s strength

Rachel de Sá of Ricoh Investimentos says one factor can mitigate the effects here: “We’ve been at the forefront of Brazil’s fight against inflation with interest rates rising. Over 13% a year. And real interest rates are close to 6%,” she says. .

Another factor that could help Brazil in the second half of the year is the eventual recovery of the Chinese economy. After a sharp decline in the economy due to the lockdown in some major economic centers such as Shanghai and Shenzhen (Eastern China), the Chinese government must “step on the accelerator” of stimulus to try to recover some of the lost growth. year.

The IMF’s forecast for Chinese GDP growth is 3.3%. But analysts point out that the local government will do its best to meet the Chinese Communist Party’s (CCP) original forecast of 5.5% expansion in 2022.