The “surprising” recovery of the economy

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By PAULO NOGUEIRA BATISTA JR.*

What explains Brazil's economic performance so far so much better than most expected?

Brazil's economic performance has been seen as surprising. Not for everyone, reader. Not because of this economist who writes to you, or not entirely. I even warned, more than once, that the economic recovery could surprise us.

Economists' forecasting ability is notoriously very low. I do not intend to exclude myself from this general rule. But what can be expected of us is, at least, a certain notion, however vague, of the direction and pace of growth of the economy.

We didn't even achieve that, however. Let's see what the Central Bank's weekly Focus survey said – a compilation of forecasts by economists from around 130 banks, asset managers, consultancies and other institutions. At the end of 2022, the Focus survey indicated just 0,8% as the median projection for GDP growth in 2023. Now, a rate of just 0,8% implies zero growth in per capita GDP, which would confirm the long-term scenario. stagnation that had been going through the country's economy.

However, in both the first and second quarters of 2023, GDP was higher than expected by the market and international institutions such as the IMF. Note, reader, that it is enough for GDP to remain stagnant at the margin, until the end of the year, for the 2023 growth rate to be around 3%, thanks to the so-called carry ovestatistical r. The result is not, of course, spectacular, but added to growth of the same order in 2022, it already puts the Brazilian economy back on a recovery path.

It is true that gross fixed capital formation and the aggregate investment rate are still weak, which leaves doubts about the sustainability of growth in the medium term. However, this is to some extent normal. First, consumption grows, which increases the use of installed capacity, and then new investments increase in expanding the production park. This is the usual sequence, presented here in an ultra-simplified way.

 Lately adjusting to the new information, the Focus survey indicates that market economists are now forecasting slightly higher growth, of 2,6% in 2023. They insist, however, on projecting only 1,3% for 2024. Perhaps they are underestimating the GDP trajectory again. They are, in any case, protected by the Wall Street maxim: “If you have to forecast, do it often” (If you have to make projections, do them frequently) With each round of the Central Bank's weekly consultation, market economists correct their errors, counting on the short memory of the public, the media and the market itself.

Causes of the economic recovery

What explains this result so far so much better than most expected? Here's a bit of engineering work done, dear reader.

In retrospect, the importance of the Proposed Amendment to the Constitution (PEC), negotiated by the elected president and approved by Congress in December 2022 - the so-called transition PEC, nicknamed the “PEC of spending” by the Folha de S. Paul. What it did was make room in the constitutional spending ceiling of the Michel Temer government, still in force in 2023, for a series of urgent expenses. Urgent at the same time from a political point of view (fulfillment of campaign promises), social (help to the poorest families) and economic point of view (transfer of resources to those who spend quickly, putting the economy in motion). For example, the resumption of the policy of gradually increasing the minimum wage in real terms.

Another example: the expansion, correction and improvement of Bolsa Família, under the command of Minister Wellington Dias. Yet another: the increase in the income tax exemption range, benefiting mainly people with low or lower-middle income. These three measures stimulated the consumption of the poorest families. For aggregate investment, what was crucial was the beginning of the resumption of public works, to be intensified with the new Growth Acceleration Program (PAC).

All these factors are concrete in nature: they directly stimulate aggregate demand and thus economic activity and employment. But there are additional factors, less observable and more subject to conjecture, plausible to a lesser or greater extent. One of them seems crucial to me – the dynamics of recovery after a prolonged period of difficulties. This is the case in Brazil today. Since 2016, the economy has been going through a period of recession/stagnation, accompanied by great political instability and deterioration of the social framework.

Any beginning of recovery, as in 2023, any sign, however modest, that the government is minimally organizing itself already has an impact on investor and consumer confidence, positively affecting the economy and initiating (or contributing to) a process of self-reinforcing recovery. The perception that this dynamic would be possible led me to think that economic growth would tend to be more pronounced than expected. The barrier, however, is the high cost of credit, resulting from the Central Bank's interest policy and the high banking spreads practiced in the country.

As the economy reacted, the job market improved, fueling the recovery. The unemployment rate fell, both in the restricted and broader concepts. The real income of workers increased a little, as a result of the reduction in unemployment and the favorable effect of the fall in inflation, particularly in food, which weighs more in the basic basket. Despite household debt, consumption reacted. It can be assumed that the reaction in consumption is, in part, due to pent-up demand during the pandemic. But this effect should have occurred more in 2022 than in 2023.

The general picture is one of success, therefore, understandably claimed by the Lula government. Attention, however. Let's not exaggerate or credit the new government with undue merits. GDP growth is still modest. And a significant part of it reflects the performance of the primary export sector (agriculture and mining), which responds to climatic factors and reflects the extraordinary progress of this sector in recent decades.

Short and medium term perspectives

Can the recovery last? From now on, it will depend more on boosting investment. The effectiveness of the new PAC, the investment program recently launched by the government, will be fundamental. The Central Bank's monetary policy needs to be less disruptive. A first step in this direction was taken at the August meeting of the Central Bank's Monetary Policy Committee (Copom), already under the influence, I presume, of the new director Gabriel Galípolo, appointed by the Lula government. Lowering interest rates would make it possible to reduce the total public sector deficit (via the cost of debt) without burdening the government with the task of generating primary surpluses (that is, in interest-excluding accounts).

It is also important that the pursuit of the ambitious target of zero primary deficit in 2024 is achieved, without obstructing the new PAC and, if politically possible, with the taxation of the super-rich, as Minister Fernando Haddad intends. Taxing billionaires is recommended, not only for reasons of social justice, but also because it is a way of adjusting public accounts and reducing the private sector's disposable income without triggering adverse effects on aggregate demand and economic growth.

If a growth rate is maintained in the range, say, 4% per year, Brazil will leave behind the time of stagnation and consolidate its position as the 8th economy in the world in terms of GDP by purchasing power parity, slightly below the Indonesia and above the United Kingdom and France.

*Paulo Nogueira Batista Jr. is an economist. He was vice-president of the New Development Bank, established by the BRICS. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa).
https://amzn.to/44KpUfp

Extended version of article published in the journal Capital letter, on the 08th of September 2023.


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