The Temporary GDP Growth in The Second Quarter

BRAZIL ECONOMICS - Report 06 Sep 2022 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

GDP growth in the second quarter was 1.2%, greater than our expectation of 0.8%. This prompts us to project growth of 3% for the year. Although expansion of the global economy contributed to this result, it was mainly the fruit of the strong fiscal stimuli, which increased consumption and gross fixed capital formation. These stimuli have originated from both reduced taxes and increased spending, in the latter case partly via income transfers and the remainder due to various forms of spending from the “secret budget”.

The greatest contribution from the demand side was household consumption, which is logical in light of the behavior of the labor market, marked by a significant increase of the occupied population and labor earnings. Another contributor was gross fixed capital formation, which was between 19% and 20% of GDP, depending on whether it is calculated at current or constant prices, and was not limited only to continuing civil construction investments. However, in the coming quarters, the effects of the restrictive monetary policy should outweigh the effects of the expansionary fiscal policy, leading to slowdown of growth. Although the fight against inflation has been temporarily supported by the politically motivated decline of fuel prices, to attain the inflation target (only in 2024), the Central Bank will have to keep monetary policy restrictive for an extended period.

In this respect, as explained in our report of August 22nd (“The Neutral Interest Rate and Fiscal Policy in Brazil”), signs already exist that the fiscal expansion has been raising the neutral interest rate. Along with this, the weakening of the fiscal framework is and will continue putting upward pressure on inflation, requiring the Central Bank to keep the financial conditions restrictive for longer than would otherwise be the case, resulting in weaker growth.

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