What the US interest rate hike and recession mean for the Brazilian economy

Inflation on the rise and recession in the United States. Problems in the largest global economy could have adverse effects on Brazil, at a time when projections for the growth of our economy in 2022 are increasing and inflation projections are decreasing.

Analysts predict difficulties in combating the rise in prices, due to the tendency of the real to depreciate against the dollar, and the possibility of capital outflow from Brazil.

The CEO of Siegen Consulting, Fabio Astrauskas, points out that the impact can be significant in Brazil, which has long lived with high inflation. Since October, the annualized rate has exceeded %.

“Even with the decline shown in the IPCA-12, it would be foolhardy to predict a sharp drop in prices. Inflation may have a gradual reduction in the country, including deflation in July, but the troubled scenario both here and in the world does not allow optimistic forecasts”, he says.

US raises interest rates to control inflation

Concern about high American inflation, which reached 9.1% in 13 months ended in June, the highest since December 1981, caused the FOMC (the Brazilian Copom equivalent) to increase for the fourth consecutive time the interest rate in USA, at 0,50 percentage point. It moved to the range of 2,25% to 2,85 % per annum.

The increase in interest rates in the United States, amid international turmoil and risk aversion on the part of investors, favors the purchase of safer assets, such as US treasury bonds, and tends to cause the devaluation of other currencies.

This makes it difficult for funds to enter higher risk countries, such as Brazil. According to B3, in the month, until the day 25, there was a little more than BRL inflow 400 millions of funds from foreign investors.

There is also less liquidity in the market. “This means less money looking for returns in the world. Less abundance of capital. And with higher interest rates there, investors think a little more about investing here or in other countries, where the risk is greater”, point out analysts from Rico Investimentos.

Even the transactions corporate companies in Brazil may be affected by the reduced availability of cash in the global economy. “This contributes to slowing down business growth,” says Alexandre Pierantoni, director of corporate finance at Kroll consultancy.

American GDP is also a cause for concern

Another concern for the Brazilian economy comes with the slowdown in economic activity in the United States. On Thursday, the Bureau of Economic Analysis (BEA) released the first preview of GDP for the second quarter, which shows an annualized drop of 0.9%, the second contraction in a row. This puts the country into a technical recession.

The slowdown is also predicted by the International Monetary Fund (IMF), which this week lowered growth expectations for the largest global economy by 2022 and 2023. If, in April, the international body projected that the US GDP would expand 3.7% this year, now it projects 2.3%. The estimate for next year dropped from 2.3% to 1.0%.

The situation of the American economy worries the Brazilian export sector, precisely at a time when sales to the country are on the rise . In the first semester, US$ were exported 25,63 billion, 50, 85% more than in the same period of 1997. It is, according to the Secretariat of Foreign Trade (Secex), the best performance since the beginning of the historical series, in 1997.

” is the largest economy in the world and Brazil’s second trading partner”, says the head of economics at Rico Investimentos, Rachel de Sá.

She warns that, in this context, with the scenario of high inflation and interest rates rising all over the world, the probability of a global recession gains strength, bringing volatility to markets around the world and increasing the chances of contagion in Brazil.

At the same time, according to Alex Kuptsikevich, analyst FxPro senior, forces the Federal Reserve (the American BC) to reduce the pace of interest rate hikes. He points out that the retraction of the American economy is not the result of monetary tightening, but the drop in public spending resulting from the end of programs related to Covid. The impacts of higher interest rates should be felt in the United States in six months.

Brazil’s strengths

Rachel de Sá, from Rico Investimentos , states that one factor can minimize the impacts here: “The fact that we took the lead in relation to the increase in interest rates positions Brazil relatively well in the battle against inflation. Our Selic rate is above 13% per year and the real interest rate is close to 6%”, he says.

Another aspect that can help Brazil in the second half is an eventual recovery of the Chinese economy. After a sharp drop in the economy due to lockdowns in some of the main economic hubs, such as Shanghai and Shenzhen (eastern China), the Chinese government must “step on the accelerator” of stimulus, trying to recover part of the growth lost this year.

The IMF forecast for Chinese GDP growth is 3.3%. But analysts point out that the local government will do its best to achieve the Chinese Communist Party’s (CCP) original forecast, which was for a 5.5% expansion in 2022.

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