World disinflation helps disinflation in Brazil – 01/21/2023 – Samuel Pessôa

The inflationary surge following the “V” shaped recovery of the world economy generated a cycle of monetary tightening in the United States, the United Kingdom and the euro zone, and even Japan is taking the first steps to tighten monetary policy.

If it is true that, to a large extent, inflation resulted from supply shocks that are now reversing, there was a simultaneous tightening of the labor market, due to the very strong recovery. Services inflation, which is not directly sensitive to supply shocks, rose in those economies.

Thus, in 2023, due to the tightening of monetary policy, there will be a reduction in growth. The perspective of a strong deceleration of the world economy suggested a very worrying international scenario for Brazil. However, the year has started and everything indicates that we will have some help from the world economy.

The first reason is that disinflation in the world helps disinflation here. Part of the goods is tradable internationally, and pricing takes place on the international market.

Additionally, since November of last year, the dollar has depreciated 7% against the main currencies of developed countries. The real followed suit and behaved well in recent months, despite Lula’s more populist rhetoric.

The basic interest rate in the US is in the range between 4.25% and 4.5%, and the consumer expectation for inflation 12 months ahead is 4%. The American economy begins to operate with real interest after a long time.

There will probably be three or four more increases of 0.25 percentage points each and we will end up, at some point in the second quarter, with basic interest rates around 5.25%, inflation expectations around 3.5% and real interest rates in around 1.9%. Given that the neutral rate is expected to run at approximately 0.5%, monetary contraction will be close to 1.4%, which should be enough to move inflation towards the 2% target at the turn of 2024 to 2025.

The weakening of the US currency results from the market being able to look across the mountain and see the way and the end of the disinflationary cycle.

In Europe, despite all the enormous uncertainty produced by the still unfinished war with no solution in sight, the predicted problems with the lack of gas proved to be much smaller than imagined. Europe is managing to replace Russia’s gas more easily than expected.

And finally, the Chinese economy, in a completely messed up way, threw in the towel, gave up on the zero Covid strategy and is on the way to normalizing economic activity throughout the second half of 2023 and the first half of 2024.

The Chinese economy closed 2022 at a level 5% below the trend that prevailed before the epidemic. There is a lot of room for growth in 2023-2024, even with possible more structural problems. Thus, activity in China should sustain, to some extent, the price of commodities.

That is, it seems that in 2023 the international economy will be disinflationary, which will help the Central Bank, with the extra advantage that the loss of tax revenue will not be so accentuated, by maintaining commodity prices at a level slightly higher than imagined.

The question is what will be the policy response to a possible more benign external scenario. Lula has demonstrated that, due to the polarization of society, he does not have the slightest appetite for macroeconomic adjustment measures in 2023. This would be an agenda for when society was more peaceful. In other words, it is possible that all the international improvement will be consumed by raising public spending.

PRESENT LINK: Did you like this text? Subscriber can release five free hits of any link per day. Just click the blue F below.