Lula needs a peace agreement in the economy – 11/01/2023 – Vinicius Torres Freire

How can a positive turnaround in the Brazilian economy happen, even if it is not a big change of pace and we are only dealing with the short term (up to two years)? That’s the subject. At least for now, discussing the Central Bank’s decision is like raining on spilled milk.

The BC management lowered the target for the Selic from 12.75% per year to 12.25%, as expected. He suggested that there are almost certain cuts of 0.5 percentage points at the meetings on December 13th and January 31st, 2024, apart from more disasters, such as a widespread war in the Middle East or greater trouble with US interest rates.

Furthermore, the statement was as usual. Interest rates depend on what will be done with the government deficit. Selic will continue at a “contractionary” level (holding down the economy), between 8.5% and 9.5%, as long as inflation and expectations are not at the 3% target. At the current rate, Selic would only reach 8.5% per year in September of next year. According to market people, the Selic stops before that, between 9.25% and 10%.

It would still be a horrible level, but that’s not the only way we can escape mediocrity or avoid something worse.

To start the conversation, it is necessary to remember that the BC’s Selic target is a very short-term rate for the cash wholesale market (between banks). It influences, but does not determine, the rates of other loan cost terms for the government and others.

In the market, rates for periods longer than two years ARE HIGHER than on August 1st, the day before the BC began cutting the Selic. Judging by rate movements and conversations with big money traders, they are higher because of American interest rates (higher, for longer) and because the fiscal target is lax or perhaps doesn’t even exist (see the “zero deficit “).

The near future of the economy looks gray. The third quarter was weak and the fourth did not start well, although it is necessary to note that we are not fully understanding the pace of the economy at least since 2021. That said, the manufacturing industry (“factories”) continues to stagnate; The consumption of capital goods (investment in machines, equipment and software, etc.) falls through the charts.

The recovery in investment could compensate for the lack of new stimulus to consumption (employment cools and there will be no large increases in social benefits). It remains to be seen what will happen to exports and, perhaps, to real estate.

In economics, this is almost a day-to-day matter, in the very short term. What can we do to avoid dropping the ball, to prevent GDP in 2024 from growing (much) less than in 2023?

Even if the Lula government works very well, its greater contributions would not have much effect during this term. For example, it will be a great achievement to approve a tax reform (as long as it is not destroyed by the lobby of the Brazilian economic elite); relevant microeconomic reforms have been approved.

Furthermore, it lacks imagination or speed. There was no such green and/or technological transition plan or major new development.

Immediately, what was possible to do was control the deficit and debt; not cast even more discredit on the fiscal framework. This way there would at least be a containment of interest rates. As it turned out, the government lit a bunch of dynamite under its fiscal plan.

Around R$30 billion extra in public works will not compensate for the tight financial conditions (even with a low Selic rate), business discouragement, industrial depression, the lack of money for more social benefits — if there is any relevant work. What the government needs to do is clean up its house, present a schedule of sensible measures and give up its old economic fetishisms. There’s still time.

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