Drought and fires increase risks of high inflation and low GDP, says LCA

If the current climate situation continues to worsen in Brazil, the impacts on the economy in the medium and long term will tend to be increasingly adverse, with repercussions on inflation and GDP (Gross Domestic Product), mainly by harming the energy supply and agricultural productivity. This is the warning from LCA Consultores.

In a macroeconomic analysis report released this Tuesday, LCA highlights that short-term expectations for inflation have been worsening since May, in the wake of the depreciation of the domestic exchange rate, and recalls that the drought has already caused changes in electricity tariff flags and is beginning to exert pressure on food prices.

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“This year’s severe drought, in a context where precipitation levels have been falling for more than a decade, has the potential to represent a significant negative supply shock – with the effects of both increasing inflation and reducing GDP growth,” the report states.

“Looking ahead, although initiatives such as improvements in electricity generation and distribution infrastructure and the continued expansion of alternative energy supply sources to hydroelectric power could help, they would take a long time to materialize and, therefore, to prove effective in mitigating the deleterious effects of the lack of rainfall,” he adds.

Regarding the basic interest rate, the LCA states that, in addition to inflation expectations, the “tight” labor market is one of the factors that has led the Central Bank to consider raising its basic interest rate, contrary to the movement of central banks in the US and other central economies.

“The probability that a Selic rate hike cycle will be implemented in the short term has become more likely. However, there are factors suggesting that the cycle will be moderate. Among these factors is the behavior of current inflation – which has shown some decompression of core measures”, says LCA, assessing that the Selic rate hike cycle “will be limited to 150 basis points”.