Brazil leaves recession behind with new clouds on the horizon

Brazil’s gross domestic product grew by 0.5% in the fourth quarter of 2021 and closed the year with a 4.6% increase. This expansion, driven by the agricultural sector and services, allowed the largest economy in Latin America to leave the recession behind. Looking ahead to 2022, the country is facing the impact that the next electoral elections, the high cost of loans and inflation may have.

Despite the prolonged drought, numerous floods and multiple frosts that the agricultural sector in Brazil had to face at the beginning of the year, managed to grow by 5.8% in the fourth quarter. For its part, the services sector and household consumption rose by 0.5% and 0.7%, respectively. In contrast, the Brazilian industry contracted 1.2%, according to data from the Brazilian Institute of Geography and Statistics.

However, clouds hang over the future of Brazil. As in the rest of the world, the country has experienced a rise in the price of raw materials, as in the case of soybeans. It is true that this can boost the growth of the agricultural sector and contribute to the improvement of the Brazilian real, but it also feeds inflation. in January, Brazil’s CPI exceeded 10%also fueled by rising electricity and fuel prices.

To deal with this situation, the country’s Central Bank has made the decision to speed up the pace of interest rate hikes and place them in double digits for the first time in five years, up to a level of 10.75%. Investors are betting that this increase exceeds 13%. As published Bloomberg, this measure has quickly revived the carry trade between the United States and Brazil, whereby investors borrow in dollars to invest in higher-yielding Brazilian bonds. However, its effect on inflation is taking longer to show. as collected Europa Press, the entity has established an inflation target of 3.5% for 2022with a tolerance interval of 1.5 points upwards and downwards.

Added to all this is that investors are now opting for an even longer tightening cycle, which caused interest rate swap contracts due in January 2023 to rise 20 basis points in Friday morning trading. The real fell 1.3% to 5.0925 per dollar.

President Jair Bolsonaro has chosen to expand cash transfers to the poor. The problem is that these measures increase the concern of investors for the abandonment of fiscal rectitude with an eye on next year’s elections.

World Bank forecasts put the growth of the Brazilian economy at 0.3% for this year and 1.5% in 2023. Meanwhile, those of the International Monetary Fund coincide with regard to 2022 and, as for next year, they place it at 1.6%.