Coface projects an increase of 1,2% in Brazilian GDP

Coface, a global leader in commercial credit insurance and specialized services, raised its projection for the growth of the Brazilian economy in 2022. The expectation is now for a GDP expansion of 1,2% this year, compared to a forecast made in April of 0,8%.

“At the beginning of the year, we expected stability. Afterwards, we revised it to growth of 0,4%, 0,8% and now to 1,2%. On the one hand, it is not very significant growth, but, on the other, we have an upward revision, with commodity prices favoring activity in Brazil, allowing more stimulus and helping growth”, said Patrícia Krause, chief economist at Coface América Latina, during the presentation, this Tuesday (14), of the report “Impacts of rising raw material prices on industries in Latin America”.

Even with the most optimistic projection, Brazil is expected to suffer a strong slowdown compared to 2021, when the country grew 4,6%, as well as the global and Latin American economies. For world GDP, Coface's forecast is for growth of 3,1% in 2022, after an increase of 5,7% last year. In the case of Latin America, this slowdown should be even more intense, going from an estimated growth of 7% in 2021 to 2,4% this year.

“Given this scenario of persistent cost pressure, the outlook is for an economic slowdown not only locally but also globally. These estimates are systematically revised and risks are more skewed toward downward revisions,” he said.

The economist assesses that the figures for global GDP growth in the first quarter were disappointing, with negative prospects for the second quarter, especially in Europe. And despite signs of stabilization in non-energy commodity prices, inflationary pressures remain high.

“It is difficult to say that we will be at peak inflation in the coming months. In May, the United States presented higher-than-expected inflation, reaching 8,6%, the highest since 1981. With the weak global GDP growth expected in the second half of the year combined with high and persistent inflation, the scenario of stagflation ends up gaining strength at least in the short term”, said Patrícia, who also draws attention to the losses in credit conditions, with rising interest rates affecting the markets.

According to the economist, the war in Ukraine and the blockades in China represent a new shock for the global supply chain, which is also accompanied by high freight rates. In addition to greater demand for goods and a shortage of containers post-pandemic lockdown, fuel prices rose sharply due to the invasion of Ukraine.

“Another important factor is the increase in delivery times in the manufacturing sector. The United States and the Eurozone are the most affected. Indicators show an improvement in May, but still with a negative scenario for delivery times. Among the reasons given are the blockades in China and the war in Ukraine,” he said.

Industry in Latin America

In Latin America, according to Patrícia, May data shows, in general, resilient manufacturing activity. However, energy prices, shortages of inputs, lockdown in China and war in Ukraine also continue to put pressure on costs.

“In Brazil, producer prices closed at an increase of 18% in 12 months, an improvement compared to the peak of 36% a year ago, but they remain at a very high level. The most energy-intensive industrial sectors are among the most impacted, such as oil and biofuels, chemicals and metals, which reflect an increase in international oil prices on the industry. Thus, the scenario remains challenging for industrial production in Brazil, despite growth, at the margin, in the last three months,” he stated.

Risk/reward in favor of the dollar

The economist also warned about risk/reward in favor of the dollar. For Patrícia, capital outflows and the appreciation of the US currency are a dangerous cocktail for emerging countries with fragile external positions. “With inflation above expected in the US, markets are beginning to bet that the Fed will raise interest rates by 0,75 p.p. tomorrow (15) and no longer by 0,5 p.p. as previously predicted, causing pressure. When we look at the short-term net flow of portfolio investment, we see an outflow of capital in recent months, which is a warning sign. We also observed a strengthening of the dollar due to risk aversion,” she explained.

In Latin America, according to the economist, there is still a net inflow of resources in the year to date. High commodity prices, in addition to faster interest rate tightening in the region compared to other emerging markets, led to currency appreciation.

“We saw an appreciation in the currencies of the main Latin American markets, with the exception of the Argentine peso, during the year. However, volatility increased with concerns about interest rates in the US. As a result, the stronger exchange rate in the region may be short-lived as tighter monetary policies in developed markets tend to renew volatility in the second half of the year. In the case of Brazil, this could be more intense due to the elections and discussions on fiscal issues,” he said.

Patrícia also added that the monetary tightening in Latin America has not come to an end. For her, the region's main economies should continue to raise interest rates in the coming months to contain inflationary pressures. For Brazil, the expectation is that the Central Bank will take interest rates to 13,25% per year at this Wednesday's meeting (15). “Our projection is that the rate could reach 13,75% in August”, she added.