The Central Bank of Brazil raised the Selic rate by 50 base-points, offsetting the tendency of most market analysts, who were betting on 75 base-points. The upward trend of interest is due to the evaluation of Copom that Brazilian industry was overheated in more than 14% compared to last year, pulling the GDP to over 9% per annum. Upon evaluation, these developments would not be sustainable to keep Brazil in the center of inflation in the proposed levels of 4.5% per year.
The shortage in supply, the increase of inputs and lack of products like automobiles, has activated the brake. It turns out that, with high interest rates, not only the industrial sector is cooling down, but all the credit, which affects trade in general, reducing the speed of circulating money. In July we found conflicting signals: on one hand, higher than expected stock in the automotive industry and reduced demand on the white line; on the other hand, extraordinary growth in the real estate and in some consumption areas, as well as in tourism. The conflicting signals have already explained why the reduction in expected inflation and the onset reduction of the interest rates.
Meanwhile, in the United States, other contradictory signals are being issued by companies and by the Fed, with some surprising recovery results in the first semester of this year, especially in the automotive sector as well as in the consumption of nondurable goods, others are showing t still very tight results, below expectation, and with this, the Fed keeps some instability on the horizon of the U.S. economy.
Europe completed its stress testing with banks and demonstrated control over the situation, although with some in the ICU. Interestingly, in the U.S., hundreds of small private banks broke without any headline in any newspaper of mass circulation. China is reducing, in a subtle way, but permanent, its growth leaded by the strong real estate sector. A significant reduction in growth is also due by rising inflation rates, but without being transferred to wages (which is why, perhaps for the first time, employees from foreign companies went on strike, demanding wage increases). Does it mean that it is starting here a process of limiting growth in terms of macroeconomic indicators?
The four examples mentioned above shows that, although they have different realities in Brazil, Europe, USA and China, the consequences are similar, meaning, growth limitation related to macroeconomic stability.
Returning the issue back to Brazil, the question remains: Is there a limit to our growth? If yes, what is this limit?
In the 1970s, there was a study issued by the Club of Rome, in which they warned nations saying that natural resources are finite and that growth was not to be indefinitely high. At that time, OPEC, which must have studied this subject very well, increased oil prices which were around $ 5.00 a barrel to near the levels seen today, up from $ 70.00 per barrel. The logic of the time was that the supplies were limited and that, therefore, growth was limited to its exhaustion.
Further, the reality showed that the limit of the growth has not occurred by the limit of exhaustion, but by growth limits in all industrial and social fields. The records of productivity and innovation exceeded unknown limits, and the economy, national boundaries have been overcome by the regional limits and by the scope of global markets. With this knowledge, we return to the Brazilian assessment. If today we have our limits tested, for not being inflationary, between 6-7%, that does not mean we can never grow beyond these limits. The boundary between 6-7% seems a feasible balance among services, growing up to 5-6% (50% of GDP), agriculture, between 6 and 7% (23% of GDP) and industry growing up to 8 %. The question is how to expand the boundaries for each of the shares of GDP, without making the evolution of inflation and /without increasing debt.
Investments in various dimensions will be the answer. In the area of services, for example, investments in education, training and systems; in agriculture, leaving the exogenous area as climate and land, investments in technology, infrastructure and human resources are crucial. In industry, investments will be needed in innovation, technology, infrastructure and human resources. The longer-term investments are not the infrastructure, but the qualification of personnel. For preparing engineers, doctors, economists and other academics the required investments are needed at least a decade in advance because before placing the student in the classroom, you will need to attract an excellent teacher, who may be working in an industry, banka local public authority. Another necessary move is to reduce the limits so far achieved, as for example, taxation, logistics lead time, the attendance time in public services and social indicators such as inclusion, poverty reduction and regional inequalities, among others.
The signal that the Central Bank is giving us is that the growth limit has been exceeded and the brake has been activated. Following historical experience, the time that the Fed uses to increase the interest rate is three times shorter than the time it takes to lower these interest rates. Consequently, to take a little foot brake means, doing the calculations, it will take more than a year and a half to reach again the level we had the beginning of this year. Maybe we can grow some of these limits, to feed a sustainable growth of 7%more over a long period. We have the right to dream with this view.