Itaú raises Brazil’s GDP projection; does not see Fed and Covid Delta variant impacting recovery

RIO DE JANEIRO, BRAZIL – Itaú raised its projection for Brazilian Gross Domestic Product (GDP) growth in 2021 from 5.5% to 5.8%. For 2022, the projection rose from 1.8% to 2% growth.

According to the bank’s economic team, Brazil’s GDP should accelerate significantly in Q3 2021 as the service sector recovers and the goods sector remains a pillar of the upturn. In addition, Itaú projects that the progress of vaccination in the country should lead to economic normalization in Q4: “we expect the entire population over 18 to have been administered the first dose by end-September.”

With better prospects for the progress of the economy, Itaú also forecasts that the primary deficit in the year will reach 1.8% of GDP, below the 2% expected previously, and 0.7% of GDP in 2022, from 1% forecast before. The debt/GDP ratio, in this context, would reach 81% in 2021 (previously 81.9%) and 80.2% in 2022 (previously 81.6%).

Notwithstanding, the financial institution believes that the greatest risk to the economy is an additional easing of the spending cap due to the social consequences of the dynamics related to the pandemic. “This scenario could affect Brazil’s already fragile fiscal sustainability, increase the domestic risk premium, and affect the interest rate, the exchange rate, and economic activity.”

The country’s largest private bank’s optimism extends to the international outlook too. According to Mario Mesquita, Itaú’s chief economist, the Delta variant of the coronavirus and the conduction of monetary policy by the Federal Reserve should not disrupt the global economy, contrary to what many have feared.

Regarding the spread of the Delta variant, the economist writes in his report that it will not hinder the control of Covid-19, as vaccines currently on the market have proven effective against more severe cases of the disease.

“Countries with large shares of the population fully vaccinated will likely experience similar scenarios to the UK, where the number of cases has increased but Covid hospitalizations remain low,” he assesses. In this case, the economist doesn’t foresee as many economic risks, because without pressure on the health system there will be no need to increase restrictions on mobility.

On the other hand, Mesquita perceives risks for emerging countries in which vaccination rates remain low. “Chile, Uruguay and Hungary have their populations almost fully immunized, while other nations, particularly in Asia, will still take a few months before they see a significant acceleration in vaccination.”

In Latin America, the economist believes that, at least in the short term, other variants will prevail over the Delta, such as the Beta, from South Africa, and the Gamma, which has emerged in Amazonas. “The acceleration of vaccination today should prevent a wave of the Delta variant in the region in the future,” he comments.

As for the Fed, Mesquita points out that inflation and wage growth in the U.S. remain high, but are driven by temporary pressures. “The inflationary advance is being driven by prices of more volatile items that are subject to supply disruptions, such as used cars, or to economic reopening, such as clothing and airline tickets,” he explains.

Itaú forecasts that the core of the PCE, the inflationary indicator most closely monitored by the Fed, will close 2021 at 3.1% and then drop to 2.3% next year. Mesquita expects the U.S. central bank to start withdrawing stimuli such as monthly purchases of US$120 billion in assets at the start of Q1 2022. The first interest rate hike, leaving the current level of rates between 0% and 0.25%, would only be implemented in December 2022 in this scenario.