Brazil’s GDP is revised upwards, while that of developed countries worsens

O Focus Bulletin This week brought the 12th consecutive market review for Gross Domestic Product growth (GDP ) of 2022. The movement differs from that observed in the largest world economies, according to a survey by the Central Bank.

Presented by the mayor, Roberto Campos Neto in August, data based on Focus and the median of estimates gathered by Bloomberg indicate that only the Latin America and Brazil had an increase throughout the year in the GDP projected for 2022.

GDP projections for the eurozone, the United States Japan, the China and the group of emerging and developed countries in August are lower than in February this year.

Behind this scenario, experts point to a combination of factors, such as the outbreak of war in ukraine a worsening of inflationary conditions, surprises with the Brazilian economy and market valuation errors.

The case of Brazil

The revisions to the Brazilian GDP ended up being even higher than those made for Latin America, of 1.7 percentage points against 0.7 pp, respectively.

Juliana Inhasz, a professor at Insper, points out that revisions are common, partly because data take time to become available, but also because projections depend on the perception of the economic situation.

In the case of Brazil, she attributes the revisions first to a high potential market, which pulls the perception of an improvement via the consumer market.

In addition, it cites a negative outlook for economies since 2020 supported by high political risk, which has created a pessimistic scenario in the market. “What you see now is that some of that pessimism didn’t materialize,” leading to revisions, says the professor.

“The negative bias was very high, and it is starting to reverse itself because the indicators have been more important than biases or the political situation”, he says.

Inhasz does not believe that Brazil has benefited specifically from the rise in oil, since production is usually of a cheaper type, but that there may have been an indirect impact by the “policies to reduce the negative impact of the rise in oil, which helped a lot ”.

“There are also issues of policy directions to get out of the pandemic. There is criticism about how other countries in Latin America have conducted this, and this also creates the perception that in some respects the Brazilian conduct was not so bad”, he says.

Alexandre Espírito Santo, chief economist at Órama, believes that economists were wrong in their projections at the beginning of the year because “they were not exactly capturing the new moment we were experiencing, with micro reforms and the job market with better expectations than actually came to fruition”.

In his view, the projections focused on the demand side, not production, and therefore did not initially capture the improvement indicated by the economy.

He believes that microeconomic reforms carried out by the government were linked to a resumption of the economy with a late reopening, with a combination of the resumption of both the services how much of labor market .

In addition, the economist points out that the Central Bank was quick to realize that inflation was getting out of control, raising interest rates before most countries, which turned out to be positive.

Today, inflation has dropped from the peak at around 12% and the market already projects a terminal value for the year around 6%, which “shows the quality of the work done by the BC”.

Espírito Santo sees room for further revisions by the market. Órama, for example, projects growth of 2.7% in 2022, and the economist expects a convergence of projections to “something around 2.5%, maybe 3%”.

change of scenery

Juliana Inhasz states that Latin American countries suffered more from the process of economic readaptation during the pandemic with delay in reopening.

This created a space for a negative perception regarding the recovery of their economies, with low forecasts for GDPs.

However, the market “was surprised because the need to reopen, with people returning to circulate, created a large space for their recovery”.

“These countries had and still have a large pent-up demand, and now they resume growth with a boost, which improves forecasts, even due to the bad base in 2020 and 2021”, explains the professor.

In the case of developed countries and some emerging ones, the situation was different. “Because they have more structure, it was thought that they would suffer less, but that did not happen, and now they pay a high price for the increase in inflation, even because they were able to give greater aid”.

The inflationary scenario in large economies is pointed out in Espírito Santo as the main reason for the different movements in the revisions.

He remembers that the inflations reached the highest levels in 40 years, and that central banks, at first, were “mistaken, thinking that inflation was only transitory, when it was not”.

“When they belatedly realized that they were wrong, they began to raise interest rates at a faster rate than one might suppose. At this magnitude where they are going, it certainly has a bad effect on activity, a strong slowdown or even recession”, says the economist.

In this sense, Espírito Santo emphasizes that there is no way to see an improvement in the economic situation in these countries in the short term, which leads to a downward revision of projections.

Inhasz notes that the war in Ukraine, which started in February, had an impact on developed economies due to their greater dependence on Russian gas, in the case of Europe but also of Petroleum as a whole for economic activity.

With commodities reaching record price levels, economies were hampered by the worsening inflationary scenario. She believes that war “accentuates the problem, not creates it. The white elephant already existed, war inflates it.”

In the case of Latin America, the rise in the prices of commodities despite being an inflation vector, had a positive impact.

“Usually these countries produce commodities, and this benefited them right away, but this increase in commodities may not be perpetuated, on the contrary. With the world in recession, commodities suffer and expectations will be revised”, warns Espírito Santo.

for 2023

The chief economist at Órama points out that a world growing less is bad for Brazil, as the country is a producer of commodities.

“With the slowdown, we sell less, at lower prices, and that’s bad. The biggest problem is knowing the magnitude of what will happen abroad, if it will be a small deceleration, something even reasonable, or if we will have something more severe, a recession, something that spreads”, he says.

In this sense, he considers it important for Brazil to “do its homework”, reducing its fiscal risk.

“You have to know that you can’t continue with a leaky roof as an anchor. If we manage to signal to the market that we are going to review, rebuild the roof, come up with a new anchor that is credible, the country has a lot of differential next year, and this is the big difference in approach”, he explains.

He recalls that the economy should already arrive in 2023 better due to the above-expected performance in 2022, and that “if we know how to take advantage of the political moment and implement this change in the fiscal, this is our great advantage”.

Inhasz also expects the Brazilian economy to struggle next year, with reduced consumption of commodities in developed markets.

“If the economy depends on the external sector and needs to recover, it may end up having a growth lower than the potential in a scenario of the rest of the world growing less”, he says.

For her, in this scenario, growth in 2023 would be “below possible”, something already indicated by market projections in the Focus, below 1%.

“The 2022 scenario is relatively good, but there is a big problem to solve, which is how to create growth capacity in the domestic market without depending on the foreign market”, he evaluates.

Even so, she believes it is possible that 2023 could perform better, as, depending on the outcome of the elections, the next government may have “expansionary policies, but with a cost over time. You have to be aware of that.”