Economic Activity: The Start of Deceleration

BRAZIL ECONOMICS - Report 19 Sep 2022 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

Since the lags of monetary policy are long and variable, a degree of uncertainty always exists regarding the start of the effects of restrictive monetary policy. Last week, three important indicators of economic activity had contrary signs. While in June and July, real revenue from services and the IBC-Br still indicated strong growth, real retail sales in the restricted and augmented senses showed significant decreases.

The high-frequency indicators referring to August and September indicate continuing deceleration. The only reason for economic activity to expand while monetary policy is strongly restrictive is that the latter’s effects are being annulled by the fiscal stimuli, which are predominantly affecting household consumption. While the performance of the IBC-Br and real service revenue is still good, the latest indicators of household consumption already are decelerating, and it is important to clarify both the reasons for and consequences of this behavior. Measured both by the one-year real interest rate and the Financial Conditions Index, monetary policy is now as restrictive as in 2015-16, when the Brazilian economy was in recession.

Although in the tug of war between fiscal and monetary policies, the first initially predominated, the second is more resistant to fatigue and is now showing signs of prevailing, a pattern that will become clearer in the fourth quarter of 2022. Economic activity will enter 2023 with generalized deceleration (or even contraction), with this movement being accentuated by the effects of the slowdown of the global economy, already under way.

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