Credit Suisse raises Brazilian GDP projection to 3.6% in 2021; UBS expects normalization starting in October with vaccines

RIO DE JANEIRO, BRAZIL – Economists point to greater optimism with the dynamics of the economy after vaccination and fewer impacts from the 2nd wave, but risks remain on the radar.

Credit Suisse raised its projection for the Brazilian Gross Domestic Product (GDP) from 3.2% to 3.6% in 2021, stressing that the rebound in supply, as well as a very robust external demand, should be the main growth drivers for the year. The expectation for 2022 was also revised from 2.4% to 2.5% due to the carry over (statistical legacy of the previous year).

It should be noted that financial market economists have raised their projections for 2021, according to the Market Focus Report released on Monday, May 10th. The expectation for the economy this year increased from a high of 3.14% to 3.21%. Four weeks ago, the estimate stood at 3.08%. For 2022, the financial market changed its GDP projection from 2.31% to 2.33%; four weeks ago it also stood at 2.33%.

Solange Srour and Lucas Vilela, economists at Credit, emphasize some factors for the upward revision of the economic figures.

First, the balance of risks for inflation remains negative, with the second wave of infections in the Covid-19 pandemic having a lower impact on inflation and economic activity than expected.

Inflation was less impacted by the second wave of infections as services were less affected, while global commodity prices rose as global demand picked up.

Commodities rose 26% year-to-date in real terms and GPI producer prices increased 10.2% in the first 4 months of the year. On the other hand, services inflation held steady in the period. “We now expect IPCA inflation to reach 7.9% on an annual comparison basis in May and then drop to 5.4% by year-end 2021, above the upper limit of the Central Bank’s 5.25% target, and to 4.2% in 2022,” Solange and Vilela point out.

The risks are high as commodity prices continue to rise, while the high fiscal uncertainty may limit a stronger appreciation of the Brazilian real.

The current account is expected to register a surplus of 0.1% of GDP in 2021, the first positive balance since 2007 with better terms of trade, larger harvests, devalued real, and travel restrictions.

Also of note, initial economic indicators for March and April suggest that the second wave of infections had a very moderate impact on the economy compared to the first wave. They highlight that the PMI, confidence indexes, trade balance and vehicle licensing in April showed positive growth in seasonally adjusted terms, despite widespread mobility restrictions in the country.

“We expect the economy to gain momentum as the pandemic recedes and social distancing measures are reduced in May,” they assess. According to the economists, the main downside risk to the scenario is yet another outbreak of infections.

The higher dollar flows may benefit the currency, but a sharper appreciation depends on less uncertainty regarding the fiscal scenario.

Incidentally, the fiscal aspect continues to be of concern. The primary deficit is expected to reach 4.4% of GDP in 2021 and the gross debt is not expected to stabilize before 2026.

The government is expected to increase spending to R$125 billion over the spending limit. These higher expenditures are aimed at mitigating the impact of the second wave, including R$44 billion in emergency aid spending and R$20 billion in programs for small and medium-sized businesses and maintaining formal jobs. “Higher expenses beyond our scenario are still likely and will continue to depend on the dynamics of the pandemic and the resumption of economic activity,” the economists assess.

In relation to gross debt, it is expected to reach 96% of GDP in 2026 and then start to
recede. According to Credit, the government will remain committed to the spending cap rule, and a change in the spending cap or higher interest rates would likely delay debt stabilization and trigger a crisis of confidence. The decline in government fiscal credibility associated with the high level of debt and financing could hasten the deterioration of the debt profile and increase liquidity risk.

Regarding monetary policy, Solange and Vilela maintain their expectation that the SELIC rate will be raised by 75 basis points in each of the next 4 monetary policy meetings, reaching 6.5% in October.

As for the political news, the economists assess that the Senate should focus on the Covid-19 Parliamentary Inquiry Committee (CPI) while the Chamber of Deputies may advance in the debate about a diluted version of the tax reform, with the unification of the federal taxes only. The debate on other taxes, such as state, local and corporate taxes, is unlikely to occur this year.

Resumption in October?

Also with a more optimistic outlook, Swiss UBS bank pointed out that Brazilian economic activity may normalize by October at the latest, depending on the pace of vaccination.

According to economists Alexandre de Azara and Fabio Ramos, Brazil’s economy may start to normalize before the classic “herd immunity” is reached – and therefore earlier than expected.

“We think that the population’s age distribution will allow ‘effective herd immunity’ and a return to normal will occur when Brazilians 30 years or older are vaccinated,” they point out.

They stress that new Ministry of Health dataset, with over 40 million records available, enables an in-depth Covid-19 analysis in Brazil on daily hospitalizations and deaths.

“Using vaccination data from the same database – and assumptions that are more conservative than the government’s – we expect a significant drop in hospitalizations, ICU admissions and deaths in Brazil starting in late May or early June, and activity should normalize by October at the latest,” they assess.

According to the economists, the so-called classic herd immunity, of a little more than 70% of the population, may be reached by the end of the year, taking into account the conservative assumption that people aged 20 and older are vaccinated.

However, resumption may occur with the immunization of Brazilians over 30, in order to relieve the health system and free up the operation of activities that depend on larger crowds. The group corresponds to 56% of the population, which can be considered the “effective herd immunity” in the country according to the bank’s assessment. As this group should be administered both doses of the vaccine by September, “the old normal” is expected to return by October.

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