UBS BB indicates Brazil may endure stagflation through 2026, marked by low GDP growth and high inflation. Chief economist Alexandre de Ázara forecasts 1.3% growth, below potential, citing declining consumer confidence and economic activity. Inflation could stay above 5% until 2026, necessitating careful management by the Central Bank to restore balance between economic growth and inflation control.
UBS BB warns that Brazil could experience stagflation throughout 2025 and 2026 due to a combination of low growth rates, worsening economic metrics, and persistent inflation. Chief economist Alexandre de Ázara emphasizes that inflation may stay above the target of 4.5% until March 2026, despite a potential recession lowering inflation more quickly.
Ázara expressed skepticism over GDP projections, anticipating growth at only 1.3% in 2025 compared to the potential 2%. Investors are hesitant to predict these slowdowns, as past forecasts were often optimistic, particularly when activity outpaced expectations by approximately two percentage points over the last five years.
Citing January data from the FGV (Fundação Getulio Vargas), Ázara revealed significant declines in consumer confidence and general activity indicators since November. Higher uncertainty, a depreciating exchange rate, and increased interest rates have compounded these issues, foreshadowing a stagnation of economic growth.
Factors that supported GDP growth in previous years, like consumer spending and investment, are expected to falter. While 2024 saw a surge in investment and consumer expenditure, that trend is unlikely to continue into 2025, as government-mandated payments dwindle and household disposable income decreases, resulting in a simultaneous slowdown of these critical components.
Inflation is projected to remain elevated at approximately 5% by the end of 2025, above the consensus projection of 5.5%. Ázara noted that weakening economic activity would not immediately lead to lower inflation, as high expectations and exchange rate shocks have entrenched prices, indicating that stagflation could persist for one to two years.
In light of these developments, the Central Bank faces challenges regarding its broader economic strategy. The institution must choose between allowing GDP growth to take precedence at the risk of accelerating inflation or prioritizing inflation control potentially at the expense of short-term economic well-being. Ázara suggests that further interest rate hikes, starting at 1 percentage point in May, could enhance the Central Bank’s credibility.
The UBS BB report indicates that Brazil is likely to confront stagflation in the next two years, characterized by low growth and sustained inflation. Factors contributing to this scenario include weakened growth drivers, declining consumer confidence, and persistent high inflation. As Brazil navigates this economic landscape, the role of the Central Bank will be pivotal in balancing growth against inflation control.
Original Source: valorinternational.globo.com
