BC raises economic growth forecast from 1% to 1.2%

“The moderate revision reflects, in particular, positive surprises in some components of the service sector in the fourth quarter of 2022 − leaving a statistical load for the sector for 2023 slightly higher than previously expected −, improved forecasts for the extractive industry and the first indicators of the first two months of 2023”, explained the BC, which also expects a “relevant contribution” from the agricultural sector in the growth of the year.

In 2022, the Brazilian economy grew 2.9%, after an increase of 5% in 2021 and a decrease of 3.3% in 2020. The services sector contributed the most to GDP growth last year. According to the BC, the sectors of the sector were severely affected by the covid-19 pandemic, initially, but since then they have shown firm growth paths. For 2023, the projection for the services sector had a slight increase, from 0.9% to 1%.

In industry, the forecast changed from stability to an increase of 0.3%, with a worsening estimate for construction and an improvement for other activities. In the case of the extractive industry, the BC estimates a 2.3% increase in the segment, compared to a projection of 1.5% in the previous report, given “favorable forecasts for oil production”.

“Relative to the expected quarterly trajectory, modest variations are expected throughout the year for industry, services and domestic consumption. Agriculture, however, should present a different dynamic, with significant growth in the first quarter, mainly due to the expectation of a high increase in soybean production. This expected behavior for agriculture should contribute to a rise in GDP in the first quarter and to a slowdown in the following quarter”, says the report.

The growth projection for agriculture was maintained at 7%, after a 1.7% decline in 2022, reflecting favorable forecasts for crops, with high participation in the sector, such as coffee, corn and soybeans.

Regarding the domestic components of demand, there were revisions of moderate magnitude in the projections: increase in household consumption, from 1.2% to 1.5%, and reductions in gross fixed capital formation (investments) for companies, from 0.3% to zero and for government consumption, from 1.1% to 0.7%. Exports and imports of goods and services, in 2023, should change, in that order, 2.4% and a drop of 0.5%, compared to respective projections of 2.8% and 0.7% in the previous Inflation Report.

“The increase in the projection of private consumption also derives from a slightly more favorable prognosis for household disposable income, due to the better-than-expected evolution of the average labor income in the second half of 2022, and the new increase in the wage value. minimum, which affects income from work and assistance and social security benefits”, says the BC.

monetary tightening

According to the document, the projection continues to reflect a prospective scenario of deceleration in economic activity this year, compared to that observed in the two previous years. “Such deceleration is influenced by the decrease in the pace of global growth and by the cumulative impacts of domestic monetary policy (high basic interest rate)”, explained the BC.

The rate remains at the highest level since January 2017, when it was also at 13.75% per annum. At this month’s meeting, it was the fifth time in a row that the Central Bank did not change the rate, which has remained at this level since August last year. Previously, the Copom raised the Selic rate 12 times in a row, in a cycle that began amid rising food, energy and fuel prices.

The Selic is the main instrument used by the Central Bank’s Monetary Policy Committee (Copom) to reach the inflation target because the rate affects prices, since higher interest rates make credit more expensive and stimulate savings, avoiding heated demand.

Credit

According to the Inflation Report, a deceleration in domestic lending greater than would be compatible with the current stage of the monetary policy cycle is a downside risk for economic activity. According to BC, in Statistics released yesterday (29), the maintenance of high interest rates, a result of the monetary tightening, and the very slowdown of the economy from the second half of last year, contributed to the deceleration of bank credit. Just last month, credit concessions fell 10.5% for individuals and 8.1% for companies.

“The data available so far suggest that the process of deceleration of credit to companies, which occurs under the influence of the cumulative impacts of monetary policy, was affected in limited magnitude by specific events related to large companies”, says the report.

Fiscal policy

Additionally, the BC mentions the “uncertainty regarding the path of fiscal policy”. This Thursday, the Ministry of Finance presents the new framework, which will replace the spending ceiling, approved in 2016. “The proposal for a new fiscal framework should bring greater clarity about the sustainability of the public debt, with repercussions on inflation expectations , risk premiums and, indirectly, on economic activity”, highlighted the document.

Em Minutes of Copomreleased this week, the BC reinforced that “a solid and credible fiscal framework” can help in the disinflation process.

Inflation

According to the BC, inflation, calculated by the Extended National Consumer Price Index (IPCA), should end 2023 at 5.8%, in the scenario with a basic interest rate at 12.75% per year and an exchange rate of R$ 5, 25. At the previous reportin December, the projection was 5%.

The agency also projects that inflation should be 3.6% in 2024 and 3.2% in 2025. In this trajectory, the Selic rate reaches the end of 2024 and 2025 at 10% and 9% per year, respectively.

The report highlights that the chance of official inflation surpassing the target ceiling in 2023 rose from 57% in the December report to 83% now in March.

The target for 2023, defined by the National Monetary Council (CMN), is 3.25% inflation, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 1.75% and the upper limit 4.75%. For 2024 and 2025, the CMN established a target of 3% for the IPCA, in both years, also with a 1.5 percentage point tolerance.

According to the report, 12-month inflation continued to decline since the previous report. However, consumer inflation increased by 0.42 percentage points in the quarter ended in February, remaining “above the range compatible with meeting the inflation target”.

For this reason, the Copom does not rule out the possibility of raising the Selic rate again, in case the disinflation process does not go as expected.