Brazil Flash Report: Activity contracts for the second month in a row.

Central Bank Economic Activity Index contracted 0.35 % in September, the second contraction in a row, indicating that GDP in the third quarter of 2021 might had contracted 0.1 %. This month, services also contracted (-0.1 %), indicating that the only sector that was still recovering from the pandemic exhausted its force.

With rising cost in the industry and agriculture and the end of the cyclical recuperation of services, Brazil recovery seems to have approached a halt. Moreover, global shortages in the supply chains, and, specially, the deceleration of the Chinese Economy, Brazil main trading partner, will constraint Brazil’s growth in the short term.

As the economy enters contractionary grounds, Central Bank faces a dilemma. Inflation reached its 5-year maximums and the fiscal framework lost its main anchor, the expenditure ceiling rule, generating upside revisions on inflation expectations. The basic recipe indicates further rises on the basic interest rate. However, the economy is already entering contraction, and the rise of the SELIC rate will further damage economic activity.

The velocity of the adjustment and the SELIC end-point rate is still a debate. As the fiscal risk increased, neutral interest rate might also had risen. For the moment, we believe Central Bank will keep its promised 1.5 bps hike for December, but we will pay much attention to its communicate in order to follow its next movements.

We are projecting zero growth for the rest of the 2021 months, indicating that annual growth in 2021 will be around 4.7%. For 2022, even though many analysts are already predicting a contraction, we believe that Bolsonaro's new social program will guarantee some fiscal push to the economy. Thus, we predict growth to be around 0.8 % in 2022.

Projections