Home Brazil BCB Morgan Stanley Warns Brazil Faces Stagflation, Halves 2022 GDP Growth Forecast to 1.2%

Morgan Stanley Warns Brazil Faces Stagflation, Halves 2022 GDP Growth Forecast to 1.2%

Morgan Stanley Warns Brazil Faces Stagflation, Halves 2022 GDP Growth Forecast to 1.2%
Source: Courtesy of Unsplash.com

NEW YORK — Latin America’s largest economy is about to deal with an adverse scenario: stagnant growth with high inflation. Analysts at Morgan Stanley are flagging the rising risks of stagflation starting to adjust their main macroeconomic projections for 2021 and 2022.

In a report to investors the New York-based investment bank lowered its 2021 growth forecast to 5.2% vs an original 5.5% expectation and applied an even more drastic reduction for 2022. The bank sees Brazil’s economic growth at 1.2% for next year compared with the initial 2.5% projection.

“GDP growth should fade materially in 2022 as we expect consumption to slow down as a result of erosion in purchasing power amid record-high debt service levels,” analysts including Andre Loes and Thiago A. Machado wrote in the report “Facing Stagflation” dated September 28. Brazil’s economy is also under increasing uncertainty steaming from next year general election, energy-rationing risks and recent fears of a possible China slowdown, they said.

Source: Morgan Stanley

Rising Inflation

While Brazil’s economic output is set to diminish in the medium term, “inflation pressures continue, now in the form of additional food price inflation and more material second-round effects, evidenced by an acceleration in inflation of services and industrial goods,” the analysts said.

Morgan Stanley is also increasing their 2021 inflation forecast to 8.6% vs 7.8% in their previous projection, as electricity prices are still high and some inertia is also being reflected in Brazil’s core prices as result of persistent supply shocks. For next year, the bank now projects that the cost of living will reach 4.4% y/y compared with an original 4% projection.

Just last week Brazil’s central bank raised its reference rate Selic to 6.25% from 5.25%, while seeing another increase of similar proportion for its October 27 meeting to ensure the inflation rate will fall to the bank’s target.

Brazil’s 12-month inflation rate reached a five-year high of 9.68% in August, higher than expected, as a steep currency depreciation and a drought in many parts of the country pushed prices higher, Dow Jones Newswire reported last week.

BCB’s Response

To deal with the possible scenario of persistent high inflation and stagnant demand, Brazil’s central bank will have to increase the cost of money in another 300bps to take the benchmark rate to 9.25% by March of next year, the analysts said.

“The central bank is approaching a stagflation scenario,” they warn.

“Unlike countries with a longer period of central bank independence and/or which have never experienced extremely high inflation, in Brazil, the market’s inflation expectations could more easily de-anchor from the target, a serious scenario for any central bank pursuing an inflation target,” according to the report.

The analysts project that the Banco Central do Brasil will deliver two hikes of 100bps in each of the last two meetings of the year scheduled for October 27 and December 8, with the Selic rate ending the year at 8.25% from a previous estimate of 8%.

“The tightening cycle would likely then continue into 2022 at the first two meetings (February and March) with two additional 50bp hikes, bringing rates to 9.25%,” the analyst wrote in the report.

Also relevant:
* Brazil’s Central Bank Raises Selic Rate to 6.25%, Sees Increase to 7.25% in October Meeting: Dow Jones Newswire
* IMF Sees Brazil’s Economy Expanding 5.3% This Year After Concluding Article IV Consultation

* On Copom Day, Goldman Sachs Sees Brazil’s BCB Raising It’s Selic Rate 100bps to 6.25%
* As Latin America’s Inflation Rises, J.P. Morgan Sees Mounting Pressure to Raise Rates


Please enter your comment!
Please enter your name here