Greater Growth, Lower Risk and Interest Rates Higher Than the Neutral Level

BRAZIL ECONOMICS - Forecast 21 Jun 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

We project growth of 5.2% in 2021, and 2% in 2022, near potential growth. In 2021, the persistence of a weak labor market will prevent significant expansion of household consumption, and the fiscal constraint will prevent a greater contribution from government consumption. With investments still low (except for the affaire of the importation of platforms by Petrobras), the greatest contribution to this result will come from the expansion of net exports, boosted by the increase of global commerce and of international commodity prices.

In 2021, inflation will exceed the target, reaching 5.7%, and should return to it at the end of 2022. For this to occur, the Central Bank will raise the SELIC rate to 7.25% in 2021, above the level compatible with the neutral real rate of 3%. If the elevation were restricted just to the neutral level, the economy would enter 2022 with a positive GDP gap, which due to the risk of higher spending (in an election year) and consequent heating of activity, would require the Central Bank to hike the interest rate even more. The balance of risks favors the cautious alternative of surpassing the neutral rate in 2021.

The combination of stronger world trade with rising international commodity prices is sustaining growth of Brazilian exports. This situation should lead to a trade surplus of US$ 85 billion in 2021. In 2022, growth of global trade and commodity prices should decelerate, but the slowdown of Brazilian growth to 2% will moderate the expansion of imports. The combined effect of these forces will keep the trade surplus healthy, with a current account surplus slightly lower than in 2021. The international reserves should remain stable at US$ 350 billion.

The increase of revenues due to greater growth and higher inflation should lead to a primary deficit of 2.6% of GDP and a decline of the debt/GDP ratio in 2021. Although this will be a purely accidental result, if the current and future governments honor the spending cap, the fiscal perspectives will clearly brighten. This is good news. However, we warn that in an election year, the tendency will be for spending to increase.

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