Fighting Inflation, Fiscal Risk and Tepid Growth

BRAZIL ECONOMICS - Forecast 13 Sep 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

With GDP for the second quarter now known, and all signs indicating that the economy is recovering, we project growth for 2021 of 5.2%. Assuming the water crisis does not lead to electricity rationing, our projection for growth in 2022 is 1.2%, meaning expansion of only 0.7 percentage point above the carry-over inherited from 2021.

Next year, foreign trade will continue to help the economy, but with less intensity than in 2021. The reason for the mediocre performance forecast is mainly the elevation of the interest rate, necessary to reestablish control of inflation.

Monetary policy in 2020 and part of 2021 was overly accommodative, which together with a succession of overlapping and highly persistent supply shocks, jeopardized the anchoring of expectations over longer horizons, such is in 2023. The Central Bank’s only recourse was to raise the SELIC rate above the neutral rate.

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