Economic scenario in the USA reduces growth prospects in Brazil, says Sergio Vale

The American economic scenario, which includes strong activity and resilient inflation, may not be favorable for Brazil, according to Sergio Vale, chief economist at MB Associados. This situation in the American economy led the Federal Open Market Committee (Fomc) to Federal Reserve (Fed, the Central Bank of the U.S), The decidethis Wednesday due to the maintenance of the main interest rates in the country’s economy for the sixth consecutive time.

Vale explains that, with US interest rates remaining at a high level, it becomes more difficult for the Brazilian Central Bank to reduce the rate here. And, with Brazilian interest rates also high, the growth of the local economy loses strength. “The possibility of Brazil growing a little more and reaching 3% decreases and an increase in GDP of between 2% and 2.5% becomes more likely,” he says.

The economist also highlights that maintaining American interest rates harms the president’s re-election bid Joe Biden, given the country’s population’s discomfort with the price of credit. “With Biden weakened, despite the legal situation of Trump If it doesn’t help, Trump will be favored. And with Trump returning, there could be a disruptive movement for politics and the world economy.”

Check out excerpts from the interview below:

How do you evaluate the Fed’s decision?

It was expected, given the latest activity and inflation data. American activity, especially labor, remains strong. This makes the Fed correctly signal that it will take time for interest rates to start falling. The Fed has signaled that it wants inflation to reach 2% and there is a certain tendency for this number to remain at 2%. And the country is very far from that. The CPI (consumer price index) in the last three months has accelerated (from 0.2% in November and December to 0.3% in January and 0.4% in February and March; in the 12 months up to March, it is 3.5%). These are worrying numbers for the Fed, and the possibility is that the Fed will continue with this level of interest rates for a long time. This will only change if there is a recession in the American economy and inflation begins to converge towards the target. I was always suspicious of the thesis that there would be a soft landing. Perhaps a tougher economic slowdown is needed.

What does the decision mean for the global economy?

It is worrying due to its political implications. Suppose there is no recession, but the inflation rate remains worrying and the Fed has to keep interest rates high for a long time. American society has shown dissatisfaction with the rate at this level. Credit and debt are more expensive. With interest rates at this level, it is difficult for Joe Biden to be re-elected at the end of the year. Now, if there is a recession, it is even worse for him. This almost makes it impossible for him to be re-elected. With Biden weakened, despite Trump’s legal situation not helping, Trump comes out favored. And with Trump returning, there could be a disruptive movement for politics and the world economy. His return would be very damaging. The protectionist policy would be more aggressive, not only towards China, but towards other countries. There is a risk of an even more interventionist and protectionist government, not to mention that it could reverse the environmental policies of recent years. It would be a negative shock in this area.

And what is the impact of the decision on the Brazilian economy?

The impact we have is a more pressured exchange rate. It costs R$5 and is between R$5.10 and R$5.20. We also have an interest rate that cannot be lowered much further. If before we could have a Selic (the basic interest rate of the Brazilian economy) at 8%, this is now more difficult. This is also where the Brazilian fiscal situation comes into play, which is an aggravating factor. The interest rate at the end of the reduction cycle is expected to be between 9.5% and 10%. Now, if there is a recession in the US, we may eventually have a more depreciated exchange rate in the short term.

Does this scenario necessarily mean weaker activity in Brazil?

The growth in economic activity, which seemed to be strong, may not be as strong this year. The first three months were strong. This helps to have a GDP of at least 2%. Now, the external situation and the fiscal issue are a risk for growth at the end of the year. The possibility of growing a little more and reaching 3% decreases and an increase in GDP of between 2% and 2.5% becomes more likely.

Could Moody’s decision to improve Brazil’s risk rating outlook have a positive impact on the economy, offsetting the consequences of rising interest rates in the US?

Does not directly impact. There will only be an impact when the country returns to investment status. Then, with this approval, the investment becomes much cheaper. That Moody’s decision is positive but marginal.