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2022: Threat of Recession Haunts Brazil

Thứ Năm, 30 tháng 12, 2021
2022: Threat of Recession Haunts Brazil

By Ana Beatriz Bartolo

Investing.com - Brazil is facing a very challenging outlook in 2022. Even with the downward trend in inflation, the macroeconomic scenario will consist of high interest rates and a devalued real, in addition to concerns about the country's fiscal situation. The presidential elections at the end of the year should act as an aggravating factor, bringing more volatility to the market.

“For 2022, the expectation for domestic consumption is not good. We expect stability or a small drop, but not growth," comments Rafaela Vitória, chief economist at Banco Inter. "We expect a growth of 0.5%, but this aggregate data reflects little, because we will have sectors in decline and sectors growing."

Vitória explains that agriculture and some industries, such as extractive industries, are better positioned for next year. On the other hand, the service and retail sectors should be affected by inflation and lower salaries leading to a decrease in families’ purchasing power.

The consumer durable goods industry may also see weaker performance, since it is lapping a higher base with recent strong quarters. "The overall temperature may point to a recession, because the sectors with strong prospects employ fewer people," explains Vitória.

"It is difficult to have a good year. The fact that Brazil is structurally weak makes it much more vulnerable to shocks of all kinds," says economic consultant Zeina Latif, who foresees a mild recession for 2022. The country's productivity is low, with a relatively poorly skilled labor force, and national industries are technologically outdated, which, according to the specialist, can be seen in the increase in imports even with the rising exchange rate and weakening real.

"We have a very weak, almost stagnant economy. We had a quick turnaround after 2020, [when the pandemic crisis started], but this brought problems, especially in fiscal matters," comments Latif.

Latif explains that the recent injection of capital into the economy was essential to minimize the economic impacts brought by the pandemic, but the national industry was not prepared to meet the country's repressed demand. "In general, Brazil spent too much and without a clear focus. So part of our inflation, which started already last year, was the result of over-stimulating the economy," she explains.

Furthermore, the increase in public spending without compensatory measures has generated mistrust about the government's fiscal commitment, which in turn puts pressure on the exchange rate and intensifies inflation and the interest rate. Among the analysts consulted by Investing.com Brazil, the forecast for 2022 is that the dollar will be in the range of R$ 5.40 to R$ 5.50, with the Selic (Brazilian interest rate) between 10.5% and 12% and an IPCA (inflation mark or CPI) close to 5% year over year, on average.

2022 Presidential Election

Latif explains that in the last year there has been an "institutional weakening of the (constitutional) spending limit," with off-budget spending and the recent discussions about the PEC of Precatórios, which changes the country's fiscal anchor. This all will have an effect on the presidential elections: "Now the market debate is about how committed the competitive candidates are to the cap rule and the fiscal responsibility law." For Latif, long-term or structural projects will only get underway after the election result is clarified.

"There is a favorable situation for a center-left candidate to win, because the level of activity in Brazil is very weak and the average consumer’s income and purchasing power has dropped a lot, either because the labor market is bad or because inflation is high. In a situation like this it is very difficult to raise a liberal, free-market flag," explains André Perfeito, chief economist at Necton Investimentos.

Although the names of the presidential candidates are not yet decided, Perfeito points out that among the possibilities presented so far, the main center-left representative that could win the elections next year is former president Luiz Inácio Lula da Silva, of the Workers' Party (PT). With a possible victory for the PT, the specialist believes that the Central Bank would not feel pressured to reduce the Selic, which at Necton is forecasted to reach 11.5% in 2022.

Perfeito explains that although interest rates have reached 2% in recent years, this reduction had no significant impact on the economy; on the contrary, it brought, "a series of dysfunctionalities in the financial system. Besides, the bond and stock markets were very disconnected.

"The moratorium interest rate was well below the perceived risk. When the interest rate goes higher, this will indicate that asset prices are low and this may generate a positive mood in the market in 2022, despite the scenario indicating that Lula da Silva will win the elections," comments Necton's chief economist.

No help from the international scene

Besides the internal challenges, the international economic climate will also be of little help to Brazil. "World trade should be stagnant and facing an inflation challenge in 2022," Latif says. "With the Fed raising interest rates and world trade growing more modestly, it is a more difficult environment for emerging countries," explains the economic consultant.

For the economist and professor at USP, José Francisco de Lima Gonçalves, the expectation is that the United States monetary policy will tighten global financial conditions over the next year, which together with doubts about Chinese demand, should impact commodities. The scenario gets even more complicated with the bottlenecks in the economy and the questions about the Omicron coronavirus variant.

"There is not much demand coming from abroad for Brazilian exports, so there will be large production in agriculture, but without pricing power. Besides, less favorable financial conditions abroad pose difficulties for investments here, which increases speculative or fixed income positions,'' explains Gonçalves.

Read also: Expectations for the Turkish Economy in 2022: Is There a Plan for Inflation?

See our full outlook series here.

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01-05-2024 10:45:17 (UTC+7)

EUR/USD

1.0658

-0.0008 (-0.07%)

Summary

↑ Sell

Moving Avg:

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Sell (12)

Indicators:

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EUR/USD

1.0658

-0.0008 (-0.07%)

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↑ Sell

Moving Avg:

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Indicators:

Buy (2)

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GBP/USD

1.2475

-0.0015 (-0.12%)

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Moving Avg:

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USD/JPY

157.91

+0.12 (+0.07%)

Summary

↑ Buy

Moving Avg:

Buy (12)

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Indicators:

Buy (9)

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AUD/USD

0.6469

-0.0003 (-0.05%)

Summary

Neutral

Moving Avg:

Buy (10)

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Indicators:

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USD/CAD

1.3780

+0.0003 (+0.03%)

Summary

↑ Buy

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EUR/JPY

168.32

+0.10 (+0.06%)

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EUR/CHF

0.9808

+0.0001 (+0.01%)

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2,295.80

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Silver Futures

26.677

+0.023 (+0.09%)

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Copper Futures

4.5305

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81.14

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85.62

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1.946

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213.73

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Euro Stoxx 50

4,920.55

-60.54 (-1.22%)

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5,035.69

-80.48 (-1.57%)

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DAX

17,921.95

-196.37 (-1.08%)

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FTSE 100

8,144.13

-2.90 (-0.04%)

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Sell

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Hang Seng

17,763.03

+16.12 (+0.09%)

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Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (1)

Sell (6)

US Small Cap 2000

1,973.05

-42.98 (-2.13%)

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Buy (0)

Sell (12)

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Sell (7)

IBEX 35

10,854.40

-246.40 (-2.22%)

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BASF SE NA O.N.

49.155

+0.100 (+0.20%)

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27.35

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266.60

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Adidas AG

226.40

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Deutsche Lufthansa AG

6.714

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Siemens AG Class N

175.90

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15.010

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 EUR/USD1.0658↑ Sell
 GBP/USD1.2475↑ Sell
 USD/JPY157.91↑ Buy
 AUD/USD0.6469Neutral
 USD/CAD1.3780↑ Buy
 EUR/JPY168.32↑ Buy
 EUR/CHF0.9808Neutral
 Gold2,295.80↑ Sell
 Silver26.677↑ Sell
 Copper4.5305↑ Buy
 Crude Oil WTI81.14↑ Sell
 Brent Oil85.62↑ Sell
 Natural Gas1.946↑ Sell
 US Coffee C213.73↑ Sell
 Euro Stoxx 504,920.55↑ Sell
 S&P 5005,035.69↑ Sell
 DAX17,921.95↑ Sell
 FTSE 1008,144.13Sell
 Hang Seng17,763.03↑ Sell
 Small Cap 20001,973.05↑ Sell
 IBEX 3510,854.40Neutral
 BASF49.155↑ Sell
 Bayer27.35↑ Sell
 Allianz266.60↑ Sell
 Adidas226.40↑ Sell
 Lufthansa6.714Neutral
 Siemens AG175.90↑ Sell
 Deutsche Bank AG15.010Neutral
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