The prospects of a recession in the United States are increasing and could drag the global economy, given the need to fight high inflation with high interest rates. The warning was recently given by executives at major banks such as Citi and Deutsche Bank. And the scenario should negatively impact Brazil. The main impact can be felt in the dollar exchange rate.
According to XP Investimentos, the possibility of recession increases in the United States. The combination of persistently high inflation and high interest rates should cause economic activity to decelerate sharply from the third quarter onwards.
“The United States is going through a very difficult period. The whole world carried out the same plan during the Covid-pandemic 24, to stimulate economies. Supply was unable to meet demand and prices exploded”, says Igor Cavaca, head of investment at Warren Asset Management.
The medicine used in the US (and in much of the world) to to contain inflation is to raise interest rates. This movement makes US debt securities – Treasuries, seen as a safe haven – even more attractive to investors, which leads to a migration of dollars invested in other economies towards the US.
How Brazil can be hit by the recession abroad
This more troubled scenario should affect Brazil and other emerging markets. Higher inflation, higher interest rates and greater possibility of global recession tend to imply a lower flow of capital inflows, directly impacting the exchange rate.
From the beginning of the month until Friday (24), the trading dollar rose 10 .7% against the real and the Ibovespa, the main index of the Brazilian Stock Exchange, dropped 00, 4%. “So soon we will not see the dollar back to the level of R$ 5,00”, says João Manuel Campanelli, COO from Travelex Bank.
The macroeconomics analyst at hEDGEpoint Global Markets, Alef Dias, points out that this behavior of the US currency indicates greater aversion to risk and a flight towards safer assets, such as Treasuries
He points out that the potentially more expensive dollar scenario signals greater inflationary pressures in Brazil, which could force the Central Bank’s Monetary Policy Committee (Copom) to promote new rate hikes Selic, which serves as a reference for interest rates. Currently, the rate is at 13,25% year and a good part of the market sees the prospect of a new increase, of half a percentage point, at the meeting scheduled for the beginning of August.
“This should also cause a brake on economic activity in Brazil”, highlights Days. And, according to him, this more adverse scenario abroad can also affect commodities, which are a fundamental part of exports and Brazilian economic growth.
Campanelli, from Travelex Bank, has a different assessment. He points out that commodities should not be affected anytime soon, as most contracts are long-term. “These are operations carried out one or two years in advance.”
On the other hand, he points out that fears of global recession contribute to adding more volatility to the Brazilian market, which is already under pressure due to of the proximity of the elections.
Commodities should help emerging economies
Economists point out that some factors should contribute to mitigating the outflow of capital towards to developed economies.
“The stock exchanges of emerging countries have been showing better returns than the developed economies and are still discounted. The persistent rise in commodity prices should help to sustain the region’s economic performance”, stress the XP analysts. According to Bloomberg, commodities accumulate an average high of 34% in the year.
XP points out that the demand for raw materials raw materials is solid and that demand should continue to rise with the effort to transition to clean energy. The price of oil, in turn, will depend on the progress of the war in Ukraine. The tendency is for the Brent-type barrel to fall to around US$ 100 if the conflict does not re-emerge.
What is happening in the US economy
High inflation in the United States – which reached 8.6% in the 12 months ending in March, the highest since December 1981, according to the US Bureau of Labor Statistics – is making consumers more pessimistic and putting the brakes on the economy.
After a 5.7% growth last year, the latest forecasts point to a 1.7% expansion in North American GDP this year, according to the Conference Board, a business entity and research center which brings together some of the country’s main corporations.
Research carried out by George Mason University in conjunction with The Washington Post shows that two out of three Americans expect inflation to worsen next year and are adjusting its spending in response to the rise in prices, which is the largest in 40 to nos.
Another survey, carried out by the University of Michigan, shows that consumer confidence is down. In May, it reached the lowest level since June 1980. According to the survey, 64% of respondents believe that their financial situation is the same or worse than it was a year ago.
The Conference Board does not consider that the United States is currently in recession. They project a rise of 1.9% (annualized rate) in GDP in the second quarter compared to the first. “At the moment, economic activity in the United States continues to expand and the labor market remains robust despite inflation and interest rates.” However, these forces should curb consumption and private investment in the coming quarters, says the entity.
The Conference Board points out that the level of activity will lose strength throughout the year and that a brief recession will occur at the end of 2023 and beginning of 2023. “This scenario is associated with persistent inflation and a tightening of monetary policy by the Federal Reserve (the American Central Bank)”, quotes the entity.
The troubled scenario in the US economy causes new highs interest rates are unavoidable. The forecast is that the FOMC (American equivalent of Copom) will increase the rate by half a percentage point at the next meeting, raising it to the range of 2% to 2. % per year. “But if inflation persists, a higher magnitude increase cannot be ruled out”, says Dias, from hEDGEpoint.
A similar situation exists in the euro zone. Inflation reached 8.1% in the 12 months ended in May. The European Central Bank (ECB) is expected to start a cycle of interest rate hikes in July, which should also cool the region’s economy. “It is inevitable to live with high interest rates for some time”, summarizes Cavaca, from Warren Asset Management.
Economies will have to give up growth in the medium term
“The general message is that all economies will have to give up greater economic growth in the medium term to bring inflation back to the target”, points out XP Investimentos.
“Despite Furthermore, we also expect that risky asset prices will have little relief ahead, given that global interest rates will continue to rise, particularly in the US and Europe, as a reaction to inflationary pressures”, quotes the financial institution.
Contrary to most assessments, Itaú believes that the possibility of a global recession in the short term seems to be exaggerated. According to the bank, the US economy has solid fundamentals. And, at the same time, the Chinese economy is in the process of reopening and Europe is showing resilience, even in the face of the war in Ukraine.