Economists say economic slowdown is starting to show in the domestic scenario, but recession risks are minimal
High interest rates, low growth and persistent inflation are some of the problems keeping economists awake both in Brazil and abroad. Around here, the Extended Consumer Price Index (HICP) remains well above the government’s target ceiling, which has forced the Central Bank (BC) to keep the Selic (basic interest rate) at 13.75% pa in the last five meetings.
As expected, the consequences of high interest rates over a long period are already starting to show. “We are seeing some reduction in economic activity on a daily basis. Weaker confidence indicators, worsening defaults and a slight increase in the unemployment rate. These are some evidences of a slowdown,” says Raone Costa, chief economist at Alphatree Capital.
Despite this, experts say that the risks of a recession – characterized by two consecutive semesters of economic contraction – are contained in Brazil. The main reason is the strength of agribusiness, which should keep up the pace of activity here.
Meanwhile, the service, industrial and trade sectors are expected to experience a significant deceleration. “This is the result of the monetary tightening that brought the Selic from 2% to the current level of almost 14% per annum,” says Helena Veronese, chief economist at B.Side Investimentos. According to her, the BC should not cut interest until the new tax framework is known. “The statement from the last Copom meeting made it very clear that the fiscal risk here in Brazil is still very high,” she says.
Raone Costa argues that there are two other factors that may contribute to an anticipated interest rate cut: the first is the decline in inflation expectations by the financial market, as measured by the Focus Bulletin. The second is the intensification of a global crisis caused by problems in the US financial sector. “If there’s something very drastic, the BC could start cutting interest rates. It’s a risk, but I don’t think it’s the base case,” he says.
Abroad, the monetary tightening should also slow down the main world economies. In the United States, where interest rates are at their highest since 2007, the Fed (Federal Reserve, the US central bank) forecasts growth of 0.4% in 2023, when the long-term target is 1.8 %.
As if that weren’t enough, the crisis in the US banking system could affect credit conditions, reinforcing the scenario of economic weakness, even if in the US the labor market and the services sector are still heated. “The country’s economy has surprised by the positive strength of activity,” said William Castro Alves, chief strategist at US-based institution Avenue.
In March, two banks closed their doors in the United States. First was Silicon Valley Bank (SVB), known as the “startup bank,” which couldn’t resist the rush to redeem its assets after investors became suspicious of its soundness.
Soon after it was the turn of Signature Bank to announce the closure of activities and the intervention of the Federal Deposit Insurance Corporation (FIDC). “They went bankrupt due to mismanagement of assets and liabilities. However, there was instability in the financial market and the authorities had to hurry to calm it down. The financial panic ends up generating a very dangerous cascading effect,” says Alves.
Helena Veronese points out that smaller banks have ridden the wave of injections of liquidity and lower interest rates during the pandemic and are now starting to feel the effects of the tightening of monetary conditions. “However, it doesn’t seem to me that this is a systemic crisis, but rather a specific problem of some institutions,” she says.
For her, the positive point in the global scenario comes from China, where recently released indicators point to a recovery in the pace of activity. “This growth is good for the whole world, but above all for emerging economies that export raw materials, such as Brazil”, underlines the economist of B.Side Investimentos.
Source: Terra
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