Despite the 2021 result, 2022 GDP should have stagnation, say experts

O growth of 4.6% of the Gross Domestic Product (GDP) in Brazil in 2021 surprised the market, and recovered the economy from the losses with the pandemic, but the year 2022 should be marked by stagnation, with an expectation of close to 0%.

To the CNN Brasil Businessexperts said that the positive result last year could have been even better, but it was affected by factors that should continue this year, in particular the inflation high and the effects of policy on the economy, especially in the exchange.

Added to this are the high interest rates, above 10%, the effects of war between Ukraine and Russia and the Presidential elections in Brazil.

On the positive end, the water crisis relieved, the country continues to generate jobs, agribusiness should have a record harvest and the dollar entered a downward trendbut negative pressures should end up weighing more.

Result in 2021

For Sergio Vale, chief economist at MB Associados, the result last year was “a little better than imagined”, and is linked to a month of December that exceeded expectations, mainly in services and commerce, in addition to the recovery of the agriculturalwhich grew more than 5% after falling 8% in the third quarter.

In a report, economists from Genial say that the positive result in the last quarter, taking Brazil out of the so-called technical recession, and in the year, is more linked to the recovery of serviceswhich only started in 2021 with the reopening of the economy.

Responsible for about 70% of the GDP, the sector is still recovering, in a later process than the agriculturallittle affected by the pandemic, and the industrywhich started the resumption in the second half of 2020.

Silvia Matos, coordinator of the Macroeconomics Bulletin of the Brazilian Institute of Economics (Ibre) of the Getulio Vargas Foundation (FGV), says that the overall result was as expected, with variations in the results of each sector within the margin of error.

The institution’s February bulletin projected, for example, a greater growth in agriculture in the last quarter, with the sector ending the year with a slight increase. In the end, the result was a decline of 0.2%, with an adverse year due to bad weather conditions and higher production costs.

The service sector, with growth of more than 4% in the year, also came in slightly below estimates, but the industry exceeded the forecast. Putting it all together, the annual GDP followed the bulletin estimate.

Margarida Gutierrez, a professor at UFRJ, considers that the result “surprised positively”, especially due to the recovery of agriculture and also of investments in civil construction and purchase of machinery, indicating an optimistic outlook for the economy.

“The recovery of the economy took place, and it was important”, he says. In the case of the industry, she associates the good performance with a good 1st quarter, with loss of breath in the rest of the year.

The service sector, on the other hand, had a strong recovery, supported in particular by areas of more advanced technology and transport logistics, segments that, according to the professor, “developed a lot during the pandemic”.

Factors such as the exchange rate devaluation, the global lack of supplies, the effects of uncertainties regarding the government’s fiscal policy and the water crisis ended up affecting the economy, preventing further growth in GDP.

Even overcoming the loss in pandemicnominal GDP has not yet reached that of 2019, according to a survey by Austin Rating, which shows that there was still room for recovery.

Expectations for 2022

Genial projects GDP in 2022 at 0.6%, with a “statistical inheritance” of 0.3% from 2021 and with the result driven by agriculture, normalization of service segments and more public investments. The scenario, however, should be “extremely contractionary”, harming consumption.

In a report, XP points out that measures to stimulate consumption by the government can help sustain GDP growth, but issues such as the war in Ukraine will put pressure on production costs. Therefore, the projection is that the result will be of stability.

Vale, from MB Associados, maintains the projection of 0% for GDP in 2022, citing the effects of Omicron variantwhich should impact GDP in the 1st quarter due to the large number of absences in the labor market, in addition to the combination of inflation and high interest rates.

“The impacts of the war in Ukraine will have repercussions in terms of inflation and interest rates, and interest rates should impact the economy in the second half of the year. The year 2022 will be much more complicated than 2021, with increasing difficulties for this year, including the electoral issue”, she says.

As a positive element, the economist points to the expectation of growth in agriculture, with record harvests, with the effects of a likely rise in fertilizers due to the crisis in Ukraine affecting more the 2023 crop.

“What can affect in 2022 is the climate issue, it can still lead the sector to worse results. We project a growth of 3.5%, but with risks”.

The appreciation of the real against the dollar, with the currency around R$5 with a favorable flow of investment, can help reduce price increases, but “it is no guarantee that it will continue to happen, and the electoral scenario may affect this trend”, he says.

The scenario outlined by Vale is called stagflationwhen a country faces high inflation with a stagnant economy with little or no growth.

Also considering this context, Matos maintained the projection of the last Macro Bulletin, with the 2022 GDP growing 0.6%, driven mainly by agriculture (2.8%), along with services (1.3%), but with the expectation of industry fall of 1.1%.

Gutierrez says that, before the war in Ukraine, he did not imagine a scenario of stagflation in 2022 due to the recovery of employment throughout 2021, indicating optimism in the market and allowing an increase in consumption, helping the service sector.

The war, however, “brings a nebulous scenario”. “The first issue is the high inflation, worldwide, with commodities soaring, and nobody knows how long they will stay that way. Financial conditions also tightened a lot, with a flight to the dollar,” he says.

The combination of higher-than-expected inflation, as well as interest rates to combat it, would impact the population’s purchasing power, with the economy slowing. The degree of impact, she says, will depend on how long the war lasts and how big it will be.

The “perfect storm” for Brazil, says Gutierrez, would be an extension of the war in the second half of the year mixed with a more polarized presidential election, which would negatively affect elements such as the exchange rate. And there is still no way to rule out new variants of the coronavirus that resume more serious periods of the pandemic.

Even disregarding these factors, the professor assesses that the growth of Brazilian GDP in the last 40 years is lower than the average of emerging countries, which shows the need to “deal with structural problems, which demand reforms, we were doing but the pandemic came. and changed the scenario”.

Among the needs, she cites the reduction of the so-called Brazil cost, tax reform, attracting investments, investing in education and increasing production capacity. “As long as we don’t have that, Brazil will always be on this trend of growing less”.