Economist predicts economic shutdown.

247 – Economist José Roberto Mendonça de Barros predicts a pessimistic scenario for the economy until the end of the year. Read the article published in Estadão:

The economy is grinding to a halt.

Our economy is stalling. Everything indicates we're repeating last year's trajectory, when more optimistic projections gave way to a major disappointment. As everyone knows, the expectation of a strong first quarter was thwarted by growth of only 0,6% compared to the GDP of the last quarter of 2012. Some, more optimistic, rolled their recovery projections to the second quarter. However, everything indicates that the number to be released will be slightly higher than the first quarter, perhaps something like 0,8%, which would lead to a projection for the year of only 2,1%, as we have at MB. Market figures are converging to the same magnitude.

In our view, and as I have stated in previous columns, the sharp acceleration of food inflation is what began to alter the trajectory of the economy. With food prices rising at an annual rate between 14% and 19%, strong pressure was placed on the budgets of the vast majority of Brazilian families, which ended up reducing the space for other purchases, thus reducing consumption.

All retail data available so far shows a sharp slowdown in sales, which is expected to continue, since the consumer confidence index, compiled by FGV, showed a negative year-on-year variation of around 10% in June.

At the same time, the same inflationary pressure led the Central Bank to begin raising interest rates, which, in our assessment, should reach the 9,5% range by the end of the year. Naturally, higher interest rates further discourage all components of domestic demand. The external sector has also shown a sharp deterioration in the trade balance, with a consequent widening of the current account deficit. This situation, coupled with the appreciation of the dollar abroad, has resulted in a depreciation of our currency, which, at the time this column is being written, was around R$ 2,25 per dollar.

Interest rate and exchange rate movements result in double pressure on economic activity. The sharp rise in market interest rates has resulted in a loss of capital for many savers and has induced less credit expansion by the banking system, since risks have increased considerably. At this moment, I believe that the ability of public banks to continue trying to compensate for the caution of the private sector is limited by the evident pressure on their balance sheets. At the same time, the devaluation of the real has worsened the balance sheets of companies that have any external liabilities.

This also increases credit risk, reinforcing the observation above. Currency devaluation also puts pressure on inflation by passing on higher import costs to domestic prices. For example, the Central Bank's commodity price index in reais (ICB) rose 5,3% in June. This data suggests that activity is likely to continue weakening. For example, the inventory indicator calculated by the National Confederation of Industry (CNI) has been rising for four months; the average inventory of automobiles in the dealership network is already 53 days, much higher than the 25/26 days considered normal.

Additionally, the number of judicial reorganizations calculated by Serasa is already the highest since 2007. Against this backdrop, major political and social events began to occur, increasing uncertainty. Although a more complete analysis of these events is not yet available, I believe we can list some consequences: - The ruling party no longer has a monopoly on the streets. - There is strong and widespread dissatisfaction among a significant part of the population. - The tranquility of reelection has evaporated, and the succession has become a story yet to be written. - The government's response has been disorganized and quite inconsistent, both politically and economically.

In the economy, alongside a discourse of fiscal restraint, we continue to see the continuation of "old" projects, such as the allocation of R$ 15 billion to Valec, part of the effort to sell the high-speed rail project. At the same time, the decision is made to issue R$ 23 billion in bonds to Caixa Econômica and BNDES, to achieve various ends, including the payment of dividends that will increase the federal government's primary surplus. Incidentally, in several interviews, the Secretary of the National Treasury insists that the entire battalion is marching in the wrong direction and that only his march is correct. Incredible!

This response pattern suggests that uncertainty will remain high, investments will be postponed, concession auctions will be less glamorous (perhaps with the exception of oil), and that growth for the year will be even lower than currently projected. Volatility will remain high, and 2014 promises more of the same. PS: The final chapter of the Grupo X story began to be written last week. Whatever its outcome, it is certain that we are witnessing the end of an era, that of the great national champions. Not only that, but also because of this, the era of "never before in this country" and the "magical moment" has ended. The reality unfolding for us is much more arduous.