BC reduces economic growth forecast from 4.7% to 4.4% in 2021

The Central Bank (BC) reduced its projection for economic growth in 2021. The estimate for the expansion of the Gross Domestic Product (GDP) – the sum of all goods and services produced in the country – went from 4.7% to 4 .4%. The information is in the Inflation Report , a quarterly publication of the BC, released today (16), in Brasília.

According to the agency, "negative surprises" in recently released data, new increases in inflation partially associated with supply shocks and an increase in the fiscal risk, of control of public accounts, worsen the growth forecasts for 2021 and, in particular, for 2022. For next year, the GDP estimate was reduced from 2.1% to 1%.

Third-quarter GDP and some of the main monthly indicators of economic activity generally turned in worse results than expected at the time of the previous report , released in September. "Corroborating the less favorable evolution of activity, business and consumer confidence indicators, particularly relevant to understand activity over the current quarter, have retreated in recent months," said the BC.

In the third quarter of this year, GDP dropped 0.1%, according to the Brazilian Institute of Geography and Statistics (IBGE). In 12 months, ended in September, the indicator accumulates high of 3.9%. “Thus, the lower-than-expected result in the third quarter and the worsening of the forecasts for the fourth reduce the growth projection for 2021 and the statistical load for 2022”, explained the BC.

In the short term, supply shocks continue to influence prices and negatively affect activity and consumption. According to the Central Bank, the limitations on the availability of inputs in certain production chains should last longer than previously expected. “Therefore, the expectation of positive effects that the normalization, even if gradual, of the industrial inputs chain may have on growth is postponed over time,” says the report.

In addition, recent questions regarding the fiscal framework, of increased public spending, have already translated into an increase in risk premiums (relationship between risk and investment returns). For BC, this impacts current financial conditions and, consequently, current and future economic activity.

In this context, last week, the BC's Monetary Policy Committee (Copom) raised the basic interest rate , the Selic, from 7.75% to 9.25% per year, maintaining the more contractionary trajectory of monetary policy.

Another risk presented by the Central Bank is the evolution of the covid-19 pandemic. Despite the favorable trajectory in Brazil, with continued vaccination, the increase in cases is noteworthy even in European countries with high vaccination levels and the recent detection of a new variant of concern, Ômicron. "These recent events indicate an increased risk of a slowdown in world economic activity, with consequences for the Brazilian economy, and even a reversal of the benign trajectory of the sanitary crisis in Brazil", stressed the BC report.

positive contributions

On the other hand, the autarchy assesses that the possibility of restrictions on economic activity in the short term due to limitations in the supply of electricity has decreased. According to the bank, as of October there was a relevant increase in rainfall, especially in the Southeast and Midwest subsystems, which allowed for some recomposition of the reservoirs, “removing the possibility of energy rationing in the coming months”.

Another factor that contributes positively to domestic economic activity in the coming quarters, especially in the short term, is the slowdown in the pandemic observed so far. “The resulting return to mobility and social interactions should still benefit the activities of the service sector that are stronger and directly affected by the health crisis – such as other services and public services, both with a high share of GDP”, explained the BC.

For 2022, the report highlights the favorable prognosis for the performance of agriculture, with expectations of normalization in the demand for beef and significant increases in agricultural production, especially those products more severely affected by climate problems in 2021. In addition, there is the the remaining process of normalization of the economy, particularly in the services sector and in the labor market, as the health crisis fades.

Projection by sectors

In terms of production, there was a reduction in growth forecasts for the three sectors in 2021. The projection for agriculture changed from a growth of 2%, in the last Inflation Report, to a decline of 0.6%, influenced by the fall in the third quarter more intense than anticipated. According to the BC, there was a drop in production estimates for crops with high participation in the sector, such as corn, sugar cane, coffee, cotton and orange, mainly due to climatic problems.

In addition, the forecast decline in cattle slaughter, "influenced by depressed domestic consumption and, more recently, by the suspension of beef exports to China, additionally contributes to the prospect of a downturn in agriculture this year."

In industry, the growth forecast dropped from 4.7% to 4.1%, with worse projections for the manufacturing industry and for the production and distribution of electricity, gas and water, partially offset by an improvement in the growth forecast of the construction industry. "The manufacturing industry continues to be affected by difficulties in supply chains and by high input prices," explained the BC.

The forecast for the service sector in 2021 dropped from 4.7% to 4.6%. According to BC, despite the relative stability in the aggregate forecast for the sector, there were relevant changes in the components. “On the one hand, the rises in the prognoses for public administration, health and education stand out; other services; and transport, storage and mail, activities that continue to benefit from the recovery of mobility and face-to-face interactions. Conversely, reflecting worse-than-expected results in the third quarter, there were reductions in forecasts for financial intermediation and related services and in real estate and rental activities”, explained the report.

The forecast for the growth of trade, which is correlated with industrial performance, was also reduced.

With regard to aggregate demand (demand for goods and services), the BC's estimate for the change in household consumption rose from 3.3% to 3.4%, given the more intense recovery in the third quarter than projected. This is due to the continued recovery of the labor market and the likely decline in the savings rate compared to the previous quarter.

The forecast for government consumption was revised from 0.9% to 1.8%, a high influenced by the revision of the historical series. "Despite the recovery trajectory, government consumption is still 2.2% below the level of the fourth quarter of 2019, which suggests that there is room for further increases over the next few quarters," emphasized the report.

Finally, the growth projection for companies' gross fixed capital formation was revised from 16% to 16.8%, in line with the improvement in construction.

Also according to the BC, exports and imports of goods and services in 2021 should vary, in the order of 5.5% and 14.5%, projections very close to those presented in the previous report, of 5.0% and 14 .2%, respectively.

Text translated using artificial intelligence.