A double-dip Brazilian recession: Could higher inflation and interest rates further dent momentum?

Strong recoveries in the U.S. and China have raised global demand for raw materials, which has sent commodity prices soaring over the past year. Moreover, ongoing Covid-19-related supply chain disruptions, goods shortages and local currency depreciation have also contributed to more pronounced price pressures in Brazil. Meanwhile, inflation expectations for next year have risen 150 basis points above the midpoint of the Central Bank’s target range (3.5% for 2022). This has forced the Bank to aggressively raise rates in a bid to ease inflation and anchor expectations. Nevertheless, amid such hikes and price pressures, business confidence, the manufacturing and services PMIs, and exports all deteriorated notably in November.


Our Consensus Forecast for Brazil’s GDP, based on projections from 50 forecasters, has been severly downgraded in recent months. Our December 2021 forecast points to only 1.2% growth in 2022. This is down 1.2 percentage points from March, when the first rate hike was delivered. Risks to the economic outlook include a worsening health situation globally, the worst drought in almost a century impacting hydroelectricity generation and the agricultural sector, and the previously mentioned inflationary pressures and tighter monetary policy. Our panel of analysts have raised their end-2022 inflation forecast to 4.9%, which is up 1.3 percentage points from March’s projections. On the one hand, the potential for further government stimulus in response to the pandemic, and in an election year, would raise aggregate demand and deteriorate the fiscal path. This poses an upside risk, while a potential moderation in global commodity prices—particularly of fuels—poses a downside risk to the outlook.

Insights from Our Analyst Network

Commenting on the monetary policy outlook, analysts at JPMorgan noted: 

“The COPOM hiked the SELIC rate by 150bp to 9.25% this week and signaled another hike of the same magnitude in February, with the wording of the statement increasing the risk of a more prolonged tightening cycle. However, we don’t see the COPOM hiking beyond March as the relevant period for monetary policy should migrate completely to 2023 by May next year, and activity weakness should continue. November inflation, which was significantly lower than expected and stabilized at 10.7%, probably reinforces our view. We thus kept our call for another 150bp increase in February, followed by a final 100bp hike in March, with the terminal SELIC rate at 11.75% next year.” 

Furthermore, commenting on the GDP outlook, analysts at Goldman Sachs said:  

“We expect some of the still-Covid-impacted services sectors (in particular services to households) to recover further in coming months in tandem with further progress on the Covid vaccination program and renewed fiscal stimulus. Still supportive terms of trade and external backdrop in general will also cushion activity. However, accelerating double-digit inflation, rising interest rates (tighter domestic financial conditions), lingering supply-chain disruptions impacting the manufacturing sector, heightened political noise and policy uncertainty, high levels of household indebtedness, and renewed deterioration of consumer and business sentiment are generating significant headwinds to activity.” 



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