The outlook for the economy in 2022 is 'limited' and points to stagflation.

Vitor Nuzzi, from Rebuildables - After a series of bad years, the outlook for 2022 remains negative, says Antonio Corrêa de Lacerda, president of the Federal Council of Economics (Cofecon) and professor in the Postgraduate Program in Political Economy at the Pontifical Catholic University of São Paulo (PUC-SP). According to him, the most likely scenario is stagflation, with growth close to zero and still significant inflation.

Regarding the price increases, Lacerda states that the new cycle of interest rate hikes, promoted by the Central Bank, will not only fail to solve the problem but will also have adverse side effects. "The key issue is that the current inflationary pressure is clearly characterized by a supply shock, not an excess demand shock!" he emphasizes.

Similarly, the labor market situation is not expected to improve, as there will be no economic growth. "More than a social problem, which in itself would justify an anti-cyclical public policy, it is also an economic issue. One more unemployed person means one less consumer."

After a weak first year, a second year devastated by the pandemic, and a third year marked by stagnation, what can we expect from the current government's final year?

The growth prospects for the coming year are limited for two reasons: first, because the current slowdown leaves few drivers for growth in 2022: high unemployment, falling real income, persistent inflation, high interest rates, low consumption, and weak investment levels are not good incentives for future growth. Second, statistically, unlike 2021, which inherited a positive statistical effect of 3,6% from 2020, the impact of 2021 on 2022 will be close to zero.

The most likely scenario for 2022 is stagflation: GDP growth close to zero, inflation lower than in 2021, but still significant. The risk of a possible recession will increase depending on variables such as the potential need for new restrictive health measures due to new variants of COVID-19. The "Auxílio Brasil" (Brazil Aid) program, while necessary, will not be sufficient to boost consumption.

The pandemic obviously had an effect on the Brazilian economy. But wasn't our economic activity already sluggish before that?

Yes, performance after the 2015-2016 recession was dismal, barely above 1% per year in 2017, 2018, and 2019. In 2020, the effects of the pandemic and the poor management of its control led to a recession of almost 4% for the year. Thus, the growth in 2021 only returns us to the 2019 level, but with much higher unemployment, a drop in income, and higher inflation.

In recent years, reforms such as labor and social security reforms were presented as necessary to, it was said, create a favorable environment and provide legal certainty so that the economy would grow and jobs would be created. Now, the discourse is being repeated with the administrative reform, for example. Have these reforms had any positive effect on the country?

There is a kind of self-deception regarding the role that so-called reforms are supposed to play. In reality, they have had little effect on the desired end, not only because their expected results are overestimated, but also because the "overall picture" does not cooperate. In other words, the combination of economic policies adopted is far from representing a viable development alternative.

What can we expect, for example, from the job market? The unemployment rate has stopped growing, according to IBGE, but informality has increased and income has fallen.

If we add up the unemployed, discouraged workers, and underemployed, we have 30 million people outside the labor market in Brazil. Employment and income are variables of the level of activity. As we already have an unfavorable situation at the end of 2021 and economic growth will not occur, the labor market situation tends to remain weak. More than a social problem, which in itself would justify an anti-cyclical public policy, it is also an economic issue. One more unemployed person is one less consumer. How can we grow without a consumer market, remembering that credit is also becoming increasingly expensive?

And what about industry? Production has seen five consecutive monthly declines and has been losing its share of GDP for years. Does Brazil need a specific policy for the sector? Was the payroll tax exemption, which has just been extended, positive?

We don't have an industrial policy in the country. In fact, we don't even have a Ministry of Industry, since it was practically abolished with the merger carried out by the current government of the former Ministries of Finance, Planning, MDIC (Ministry of Development, Industry and Foreign Trade), and Labor and Employment, the latter only recently being separated. The topic of industrial policy is completely off the agenda. Payroll tax exemptions, as well as other specific measures, are merely palliatives that do not address the major issues posed by the technological revolution of Industry 4.0 and 5G telecommunications, to cite two examples.

Inflation is showing signs of renewed vigor. Are the successive interest rate hikes having any effect, considering that inflation is not due to "excessive" consumption?

Recent inflationary pressure has a specific purpose. The increase in commodity prices, especially oil and grains, on the international market, coupled with the devaluation of the real, has put pressure on domestic prices of fuels, cooking gas, and food, among other items.

Specific factors in our market, which go far beyond the ever-present fiscal issue, are also relevant: the international price parity policy practiced by Petrobras, market structures in various oligopolistic sectors, and indexation are some of them.

The issue of the benchmark interest rate in Brazil represents a significant paradox, especially given the current situation: faced with the prevalence of the Inflation Targeting Regime and the ineffectiveness of other instruments to combat inflation, raising the Selic rate appears to be the only alternative, with dramatic economic and social costs!

The contradiction lies in the fact that raising interest rates will not solve Brazil's current inflation problem, although it will produce several adverse side effects. The key issue is that the current inflationary pressure is clearly characterized by a supply shock, not an excess demand shock!

“High interest rates are a classic mechanism for combating price increases resulting from demand pressure, which is not our case. Our situation is exactly the opposite. There are clear signs of stagflation: high inflation, chronic industrial contraction, high levels of idle productive capacity, significant unemployment, and a drop in income.”

The increase in interest rates is not neutral, causing detrimental effects, making private credit and financing more expensive and raising the cost of rolling over public debt. This will deepen the fall in demand, negatively affecting other aspects, with the added problem that it will worsen the country's fiscal situation, as well as that of indebted families and businesses. It also favors financial investments at the expense of productive investment, the opposite of what we need!

Finally, the current government has spoken several times about a "recovery" and a "V-shaped recovery." Do you see any signs of this on the horizon?

Unfortunately, no. All the factors already mentioned point to a scenario of stagflation.