Weak economy contradicts Lula’s promise of growth

President Luiz Inácio Lula da Silva (PT) promised national prosperity in his government, stating that his third term would show average economic growth of the first two governments (2003 to 2010) – around 4% per year. But the prospects for the coming years indicate that the promise is unlikely to be fulfilled.

“In these next four years, we’re going to do a lot more than I did in my first eight years. The worker will receive, in addition to inflation, the average GDP growth, as we have always done in our governments”, said the president in a union act on May 1st.

Amidst the risks for the domestic and foreign economy, Lula is betting on public investment and other actions, such as a program to increase the minimum wage, to revive productive activity. But analysts and politicians heard by the People’s Gazette discard the vigorous expansion of the Gross Domestic Product (GDP), which measures the performance of the economy. They estimate a percentage lower than the average of the PT’s first two terms and, at best, a tie with the management of the predecessor Jair Bolsonaro (PL), hampered by the Covid-19 pandemic and the war in Ukraine.

GDP grew 2.9% in 2022, a slowdown from 5% the previous year. For this year, the financial market calculates an increase of 1%. As for 2024, growth would rise to 1.4%. The government’s projections are more optimistic: growth of 1.6% in 2023 and 2.34% next year.

Considering the market projections for 2023 and 2024, the GDP would need to jump more than 6% in each of the last two years of the government so that Lula can fulfill the promise of bonanza – a much higher number than the projections for the year of 2024. 2025 and 2026.

The challenge self-imposed by Lula 3 to repeat the growth experienced in his previous terms, between 2003 and 2010, will not be easy. During the Lula 1 government (2003-2006), the average annual variation in GDP was 3.5%, while in Lula 2 (2007-2010) this figure reached 4.6%. The annual averages of the two governments together register 4.05% in the period. Look:

Domestic and foreign scenarios demand speed in reforms

According to Bruno Carazza, from Fundação Dom Cabral (FDC), the government is facing “extremely complex and challenging” scenarios inside and outside Brazil for GDP growth.

“This year a meager expansion is expected and next year’s will depend on the reduction of the fiscal deficit with the new expenditure control mechanism, in addition to tax reform, the Chinese economy, the developments of the war in Ukraine and the level of interest rates in the United States. United States and in Europe”, sums up the professor.

For Lula’s desired development to take place, Carazza highlights the need for Congress to approve economic reforms announced by the Planalto quickly and consistently.

“It was expected that the current Administration would be agile, even to take advantage of the post-election impulse. Lula, however, delayed the plans of the Minister of Finance, Fernando Haddad. If the projection of the president of the Chamber, Arthur Lira (PP-AL), is confirmed, the urgent projects will be voted on by the Senate only in the second semester”, he details.

The difficulties in the economy have been dealt with by Lula, sometimes with disdain, sometimes with third parties being held accountable, as a supposed “cursed inheritance” from Bolsonaro and, above all, the interest rate policy conducted by the independent Central Bank (BC).

At the last meeting to define the basic interest rate (Selic), the monetary authority opted to keep it at 13.75% per annum. The decision provided a new argument for the PT’s routine attacks on BC president Roberto Campos Neto, whom he considers an agent of the opposition.

President challenges critics and bets on unexpected recovery

During breakfast with journalists at the Planalto Palace on April 6, Lula reaffirmed his commitment to the resumption of economic growth, as a step after giving priority attention to social programs in the first 100 days of government.

Without stipulating what should be the evolution of the GDP in his third term, he said there is no “magic” to improve the indicators, remaining to pursue changes that the conjuncture allows within the correlation of forces in the Legislative. Analysts see in a realistic tone the fear of the president with the reflection of the economic weakness in the polls.

In April, several indicators attested to the worsening of the Brazilian economy. The International Monetary Fund (IMF) has revised downwards the country’s growth forecast in 2023, from 1.2% to 0.9%. Furthermore, market economists’ average forecast for 2023 inflation rose to 6.01%, indicating prices under pressure. The industrial sector registered a decrease of 0.2% in production in February, in relation to January, the third consecutive fall, showing that the sector continues to face problems.

Government revenue also indicated a drop in March 2023, reaching R$ 171 billion, a reduction of 0.42% compared to the same period of the previous year. The drop is due to the lower level of economic activity and persistent inflation. Finally, the unemployment rate rose from 8.6% to 8.8% in the first quarter.

With no chance of revoking the BC’s independence, Lula redoubles accusations against the institution of acting politically and of being insensitive to unemployment. At the same time, the president is investing in pressure from businessmen and economists who are critical of the highest interest rates in six years and in appointing directors for the bank aligned with the government. But the bad numbers for the economy do not necessarily lead to a drop in interest rates, considering the BC’s vigilant profile and the expectation that the inflation target will only be reached in 2024. During a debate in the Senate, at the end of April, Haddad stated that if the If Selic continues at the current level, public accounts will deteriorate with low growth.

In public, Lula’s speeches try to keep the promise to voters of better days for the economy.

“We will grow more than the pessimists are predicting. Let’s see what will happen when people start producing more, buying more, selling more. It will be an important leap”, he said during a ministerial meeting at the Planalto Palace, on April 3.

For politicians and analysts, Lula will blame others for the failure

According to the political scientist and general director of the Ranking dos Politicians, Juan Carlos Gonçalves, Brazil today is very different from that of the beginning of the century, when Lula assumed the presidency for the first time. “The country does not have that high valuation of mineral and rural commodities and still faces legal uncertainty, with the president threatening to renationalize companies and extinguish regulatory frameworks”, he said.

For him, Lula’s posture scares away foreign investment and slows down GDP growth. “Even with a significant drop in interest rates, it is unlikely that the country will achieve annual growth above 3% in the coming years,” he said.

Gonçalves believes that Lula will end up transferring the responsibility for frustrations in the economic plan to the Central Bank, Congress or external factors. “But this success or failure is always credited to the Executive, as taught by the phrase of James Carville, adviser to US President Bill Clinton in the 1992 election campaign: ‘it’s the economy, stupid’”.

Gonçalves understands that tax reform should be the government’s top priority, as it directly contributes to GDP growth and fiscal sustainability, even without major immediate gains. He highlights the study by economist Bráulio Borges, from LCA Consultores, which predicts economic expansion of 33% in 15 years, if the project under discussion in Congress is approved.

“The scope of the reform will define whether Brazil will continue with mediocre results or whether it will have the judgment to become a viable country”, he concluded.