What explains the pessimism of the markets with the GDP 2023

Projections point to contained growth in 2023 after stagnation in 2022.| photo: Bigstock

Although it slightly improved its GDP forecast for 2022, the market did not change its estimate of weak economic growth in 2023.

According to the latest edition of the Focus bulletin, the median of the country’s financial institutions’ expectations for the change in national GDP this year has fallen from 0.3% to 0.42%. However, for next year, the median forecast remained at 1.5% for the third consecutive week. At their best, bank and brokerage forecasts for 2023 pointed to economic growth of 2.5%, but expectations started to dip from September.

By comparison, the Organization for Economic Co-operation and Development (OECD) estimates that global GDP is expected to grow by 4.5% in 2022 and 3.2% in 2023, while the 38 member countries of the group are expected to grow by 3 .9% and 2.5%.

In the opinion of most economists, the country’s economic activity should still suffer the consequences of the deceleration caused by the rise in the base interest rate. In an effort to contain inflationary pressures, the Monetary Policy Committee (Copom) of the Central Bank (BC) has already raised the Selic rate to 10.75%, which was 2% until March 2021.

The committee signals that there will still be new highs at the next meetings, with the prospect of reaching 12.25%, according to the median of the latest projections collected by Focus. However, some institutions are already planning a base interest rate of up to 14% due to inflationary pressures generated by the war in Ukraine.

The measure makes credit more expensive, discourages consumption and, therefore, drives up prices. On the other hand, higher interest rates also discourage economic activity, hampering growth. “It’s 10 percentage points high [caso a taxa chegue à casa dos 12%] which, in effect, hampers the functioning of the economy as a whole, the way companies access credit and even corporate debt. There is less money left for companies to invest or take out credit for new businesses, which costs more,” explains Samuel Cunha, economist and partner at H3 Invest.

With IPCA anticipation up for eight weeks (it is now 5.65% for 2022, more than half a point above BC’s target cap), the trend is for the rate to hold steady. basic interest at high levels. For now, the median of the market projections indicates that the year should turn with a Selic at 12.25%, only in January 2023 to start a bearish cycle which, according to the median of the expectations, will take it to 8.25. % through the end of 2023 – until last week a slightly lower rate of 8% was expected.

“We will always be under the impact of high interest rates. It is likely that the Selic will stay at this level all year. We see that this impact is not limited to 2022,” says Sérgio Vale, chief economist at MB Associados.

“It’s a very slow recovery scenario. It is a conjunction of emerging from the pandemic with high inflation, deteriorating finances, and which, for monetary policy, is the worst of all worlds. This throws the interest rate to a level which, unfortunately, prevents the recovery of the economy from being better than it is,” says Vale.

Cunha, on the other hand, considers that weak growth is preferable to a scenario of unbridled inflation. “Of course the higher interest rate is dragging the economy down, but staying at the level of inflation that we’ve had throughout 2021 tends to be much more damaging, given the consolidated term,” says- he.

The political scenario also affects the 2023 GDP projections

The second reason for caution in market expectations is the political scenario. Uncertainty about the economic policy of the next government makes any more optimistic prognosis difficult.

“The pre-candidates who are there have set a somewhat worrying agenda, which must be followed,” explains Vale. “The management that inherits this very degraded budgetary situation will have to deal with it in a balanced way, and it is not clear whether the coming government will be able to do this.

Partner H3 agrees. “The two candidates who are leading the polls today are very opposite in terms of ideology and proposals, but on both sides there are negatives for the economy as a whole,” Cunha said.

“As well a possible election of Lula [PT] as a possible re-election of the [Jair] Bolsonaro [PL]. We have seen, especially in the past six months, that both are populist candidates, who tend to aim for more expansionary fiscal policy. This is what the market sees as negative and which can undoubtedly alienate investors,” he says.

For Vale, a scenario that could revive the economy would require a combination of measures that seems far from realized. “If Lula wins, the best thing we can do would be for him to signal that he is going to maintain good practice, which was positive under the current government. There haven’t been many things like that, but it’s not about reinventing the wheel in what has changed, ”he analyzes.

“Trying to break the cap rule, revise the BC Independence Act, that kind of discussion, doesn’t help. The best the government can do would be to bolster a program related to tax reform, leaving the cap rule to be discussed only in 2026, which is constitutionally required. Then he would deliver spectacular news to the market and probably have a very peaceful storyline. But there’s no way of knowing if it will actually happen,” says MB’s chief economist.

Depending on its duration, the war in Ukraine also tends to have an effect on the global economy and, therefore, on Brazil. However, the market is still watching this issue cautiously – the median expectation for 2023 has not changed after the conflict began.

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