Synthesis of the Brazilian Economy
The Brazil Synthesis is a monthly overview of the Brazilian economy, with commentary and charts. The report begins with a timely topical overview, and charts provide a snapshot of the economy.
Uncertainty is the name of the game
Tarcísio strikes the right tone, the PCC suffers a setback: To the relief of those rooting for the end of the dictatorship of extremes,Tarcísio de Freitas, governor of the State of São Paulo, struck the right tone when he said, at a financial market event, that “Brazil can no longer bear the PT” and that the country does not need a “backward mentality from 20 years ago.” He got it right without having to compare his age (50) with Lula’s (80 next month), channeling the population’s weariness with old promises, bravado, worn-out slogans of the past, as well as the enormous institutional degradation and lack of a project for the country. At another event, he cited Juscelino Kubitschek’s government, the president historically branded as “modern” for the bold construction of Brasília and launched the slogan of the need to do 40 years’ worth of work in 4 years. As relevant as the slogans was the correct diagnosis presented, with emphasis on solving the current fiscal chaos, citing paths suggested by all who care about the country’s future. At the same time, also bringing relief and hope, the non-aggression pact among all pre-candidates remains firm. Adding to the optimism, which had suffered a slight setback with Trump’s tariff announcement, Atlas Intel released a poll for Bloomberg News last week showing that, in a second round, Tarcísio would surpass Lula with 48.4% against 46.6% (margin of error 1 pp), overturning Lula’s 4-point lead in July’s poll.
The economic environment remains increasingly uncertain, whether due to external or domestic developments, though markets seem to ignore the mounting risks.
The recent assault by Donald Trump on the Federal Reserve may have dire consequences both for U.S. inflation and for the future of the dollar. It is no secret that the accusations against Lisa Cook, a member of the Fed’s Board of Governors, are aimed at securing yet another seat on the board.
Even if we do not see three rate cuts for the remainder of the year, there is no doubt that U.S. monetary policy will be looser than expected not long ago, particularly right after the July FOMC meeting. This contributes to the weakening of the dollar, which has lost about 10% against the euro and 8% against a basket of currencies this year. This weakening also manifests domestically. The dollar lost about 11% of its value against the real, but only 0.7% against the euro and around 2.5% against the currency basket, suggesting that the real’s appreciation reflects external rather than domestic factors. In particular, exchange rate effects, although strong, manifest over a shorter period than the monetary policy horizon. Thus, while favorable, they are exhausted before the relevant horizon, limiting their effectiveness in reducing Copom’s inflation projection guiding monetary policy. Over the longer horizon, the main determinant of inflation, aside from expectations, is the behavior of the output gap.
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