Lula’s government predicts a rise of 1.6%, with high interest rates and a super harvest

The government of Luiz Inácio Lula da Silva (PT) released this Friday (17th) its first official projection for the performance of the Brazilian economy in 2023. According to a bulletin published by the Economic Policy Secretariat (SPE) of the Ministry of Finance, the expectation is a 1.61% growth in the Gross Domestic Product (GDP) this year, below the 2.9% recorded in 2022.

The projection represents a drop of almost half a percentage point in relation to the SPE’s previous projection for 2023, made in November, still in the government of Jair Bolsonaro. At the time, the expectation for economic growth this year was 2.1%.

According to the SPE’s Macrofiscal Bulletin, one of the main reasons for the revision is the effect of interest rates on economic activity, which had previously been underestimated. On the positive side, the note highlights the record harvest of grains expected for this year and the recovery of the mining industry, thanks to the resumption of growth in China.

What should disrupt the GDP in 2023, according to the government

“The 0.49 pp reduction in GDP in 2023 took into account the economic indicators released since the last grid, which continued to show cooling at the margin, and the more intense lagged effects of monetary policy on activity and the credit market than the previously projected”, says the text of the economic team. “The prospects for reduced liquidity in the US and other economies also contributed to the revision of the previous projection.”

According to the SPE, the slowdown of the economy should occur both in the service sector, affected by the high indebtedness and commitment of the population’s income, and in industry, where the high cost of credit should make it difficult to roll over debts and new productive investments.

The note also mentions the rise in interest rates in other countries, which harms liquidity and increases the risk of default and uncertainty in the stock markets. “In the United States, the displacement of future interest curves has already led to bank failures, increasing the prospects of contagion in the global financial sector. The increase in risk aversion arising from this scenario has the potential to reduce bank and non-bank funding, further harming plus the credit and growth scenario”, says the SPE.

What should help GDP in 2023, according to the government

Among the “positive vectors”, in addition to the superharvest and the extractive industry, the SPE note lists “social protection measures” that can help the service sector, such as the real increase in the minimum wage, the increase in the tax-exempt range Renda, the new Bolsa Família benefits and also the Desenrola debt renegotiation program, which has yet to be launched.

For the economic team, measures like these should increase the real income of the poorest families, “leading to the reduction of poverty and social inequality, a fundamental step to guarantee sustainable growth in the long term”.

“It is also worth noting the extension of grace periods and contracting of PEAC-FGI and Pronampe, which can soften the impact of reduced liquidity on micro, small and medium-sized companies. For the construction industry, new impetus should come with the resumption of the Minha Casa, Minha Vida program”, states the text.

Government is more optimistic than the market and international organizations

Despite the reduction in relation to the SPE’s previous expectation, the current projection for the 2023 GDP is more optimistic than the forecasts of the financial market and international organizations. The median expectation of economists consulted weekly by the Central Bank reached 0.89%, after four weeks on the rise.

This Friday (17), the Organization for Economic Cooperation and Development (OECD) reduced its projection for the Brazilian GDP in 2023 from 1.2% to 1%. Recently, the International Monetary Fund (IMF) had done the opposite, raising its estimate from 1% to 1.2%.