Brazil’s post-epidemic recovery is threatened by inflation and rising interest rates

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Brazil’s economic dynamics

As economists warn about inflation and interest rate surges and the unprecedented impact of drought, Brazil’s post-pandemic economic recovery may slow down sharply next year.

During the Covid-19 crisis, driven by policies to maintain business operations to a large extent, Latin America’s largest economy returned to pre-pandemic levels in the first quarter of 2021 and looks set to achieve more than 5 percent by the end of the year. % Annual growth rate.

The second-quarter data, which is expected to be released on Wednesday morning, will show that the economy has grown 0.1% from the previous quarter and 12.7% from the same period last year.

However, the outlook for next year is getting bleak and analysts are now beginning to lower their annual growth forecasts to between 1% and 2%. In addition to concerns about rising prices and interest rates, many people are also worried about the political turmoil before next year’s presidential election. There are also concerns that the government may give out cash in the form of a new social welfare program, thereby jeopardizing its financial situation.

“Looking forward, the economy will suffer a triple blow. The first is inflation. This will definitely weaken the purchasing power of consumers. The second is the consequences of inflation-the central bank is now eager to deal with it. [interest rate increases]. In order to fight inflation, we will have to harm the economy,” said Marcelo Fonseca, chief economist of the asset management company Opportunity Total.

“The third is uncertainty. The fiscal system is in danger, and I don’t think this outlook will change during the election period. There will be a lot of turbulence, so a slowdown in investment that drives economic recovery is inevitable.”

Inflation, which has always plagued many Latin American countries, has suddenly come back this year. Brazil Frightened the decision makers who are now eager to control prices.

In the 12 months ending in July, the inflation rate was 8.99%, well above the 2021 target of 3.75%.In response, the central bank raised the benchmark Choose interest rate Since history As low as 2% To 5.25%. The market expects to reach 7.5% by the end of the year. This will further drag down economic activity.

To further complicate the situation, the unemployment rate is as high as 14%, which means that consumption is still hampered.

Andre Braz, an economist at the Brazilian Institute of Economics, said: “This year’s inflation has disappeared-the effort now is to control it next year.”

“Brazil is a very unequal country. The poor have a higher inflation rate than the rich because the poor spend more of their income on food — and food prices have risen more than other categories,” he added.

“It looks like I’m being tested,” Brazilian President Jair Bolsonaro said last week, referring to the country’s unprecedented drought threatening power outages. © AFP via Getty Images

In addition to food, the worst drought in the past 100 years has caused losses, and electricity prices have soared.

Brazil relies on hydropower for 65% of its energy generation, but as the reservoirs in the central and midwestern parts of the country are now almost dry, the government is increasingly worried about power outages, which will hit the real economy.

“We have never seen such a drought-it looks like I am being tested. I am calling you at home now: turn off the lights. In this way, you will help save energy and water resources for hydroelectric dams,” the president Jair Bolsonaro said last week.

Opportunity Total’s Fonseca added: “Whether it’s preventive power rationing or just frequent power outages, the point is that this is the main tail risk for growth in the next few quarters.”

Economists are also in a state of tension ahead of next year’s presidential campaign, which may bring obvious political turmoil. Lagging behind in the polls, Bolsonaro Violent attacks on Brazil’s democratic system in recent weeks have triggered the specter of a coup and frightened international investors in emerging markets.

10-year yield (%) line chart shows that Brazilian debt is facing selling pressure in 2021

“Worries about political stability have become more worrying. So far, we have been using it as [show]. But this is not a child’s play. Maybe they do mean harm,” said Paulo Bilyk, CEO of Rio Bravo Investimentos.

Analysts also worry that the government may give up its commitment to fiscal consolidation before the polls in order to use cash to win votes.

Brazil’s public debt accounts for 84% of GDP, which is still high for developing economies.

So far, investors have been optimistic about risks, mainly due to the mandatory spending ceiling, which keeps government spending in line with inflation. However, if this ceiling is lifted, many people predict that Brazil’s assets will flow out and the economy will fall into serious turmoil.

“The economic team is clearly trying to come up with a solution to meet the financial constraints and the demands of politicians. Aberdeen Standard Investments investment director Viktor Szabo (Viktor Szabo) said that as the election approaches, the risk is that politics will prevail.

“Brazil can easily get back on an unsustainable debt track. It has fairly high debt and a fairly short maturity-you don’t want to mess up this situation. Debt can easily explode.”

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