Risk of a Recession in the US

Entirely focused on the reelection of Jair Bolsonaro, the Brazilian government should be more attentive to the perils of a recession in the U.S., the world’s largest economy and Brazil’s major trading partner.

In the midst of a crisis and ravaged by the uncertainties of an election year, Brazil is now facing the danger of a recession in the world’s largest economy, the second-largest importing market for Brazilian products and the main destination for its industrial exports. The Central Bank of Brazil increased the estimated growth for the country this year from 1% to 1.7%. Although some optimism is justified, this data review still points to significantly lower dynamism than observed in other emerging markets and a performance lower than expected for the global economy, with a rise of just around 3%.

According to a study by Michael Kiley, a senior economist at the Federal Reserve, the risk of recession in the United States in the next four quarters is above 50%. Extending this projection to the next two years, the probability rises by two-thirds. If a downturn occurs, its effects could have a significant international impact. For Bolsonaro and his team, this should serve as a warning to take care of the country’s economic security and waste less time trying to intervene in the administration of PetrĂ³leo Brasileiro S.A.

In the United States, an economic downturn and a higher unemployment rate could follow the highest inflation in 40 years. Consumer prices rose 8.6% in the 12 months before May in the U.S. market. The last time a result worse than this (8.9%) was registered was in the period ending with December 1981. Trying to contain inflation, the Fed started to raise basic interest rates and reverse the policy of currency expansion. The expansionist actions served to help the country recover from the first wave of the COVID-19 pandemic in 2020.

The recovery was successful. In 2021, the gross domestic product of the United States was 5.7% higher than the previous year, when it had decreased by 3.4%. But after this strong growth, the U.S. economy began losing momentum and shrank by 1.5% in the first quarter of this year. Recent projections still point to more than 3% growth this year and 2% next year. However, increased tightening of the monetary policy tends to lower expectations.

The invasion of Ukraine by Vladimir Putin’s troops had already considerably altered the forecasts for the great global powers and, thus, for the world economy. Published in early June, the OECD Economic Outlook prompted a significant revision of these numbers. The global economic growth estimated for December was reduced from 4.5% to 3%. The expected growth for the United States went from 3.73% to 2.46%.

For Brazil, the increase in gross domestic product in 2022 was recalculated from 1.4% to 0.6%, with a recovery of 1.2% in 2023. Expectations regarding the Brazilian economy are lower than forecasts by the Brazilian Central Bank and other public and private sources. However, a revision is unlikely to prompt any meaningful change in the coming months. The country is growing well below the world average and continues to lag behind other emerging countries. It demonstrates crucial imbalances and has little potential for economic expansion in the coming years.

Medium- and long-term growth projections barely reach 2% per year. For many years, investments in production-related resources have been insufficient to provide the country with a potential similar to that of other emerging or developing economies. Furthermore, Brazilian inflation remains above levels observed in most capitalist countries. In addition, there is considerable insecurity regarding the general government balance.

For all these shortcomings, any risk of contagion from a new recession in major economies is especially worrisome. Except, of course, for people like the Brazilian president, who is more dedicated to pursuing populist formulas for his political survival.

About this publication

Be the first to comment

Leave a Reply