25% of nothing

• Those who had the time and patience to go through BCB communication since the beginning of the easing cycle have surely concluded that the main intellectual argument for its dovish stance in terms of monetary policy has been the supposed “disinflationary bias” stemming from the international scenario;

• Although more recent communication has eschewed this particular expression, earlier versions of the case for monetary easing upon the assumption that the impact of the external turmoil would have an impact on the economy “equivalent to one fourth of the impact observed during the international crisis of 2008/09”;

• Though the Brazilian economy was never even close to experiencing such, poor output growth in the past 4 quarters has been branded as vindication for BCB actions, as well as its allegedly accurate reading of the international environment;

• Yet, if it were the effects of global deceleration that led to Brazilian slowdown, we should find evidence of similar impacts on comparable economies, in particular other Latin American commodity exporters;

• The evidence, nevertheless, begs to differ. Contrary to the observed in 2008-10, Brazilian growth rates deviated substantially from those of its peers, an indication that the slowdown in Brazil is not only (nor mainly) the result of a common external force, but rather idiosyncratic (domestic) factors;

• Building in previous research we argue that the most relevant elements within domestic factors are those supply related, mainly the recent developments in the labor market. As a matter of fact, something between one fourth and one third of Brazilian growth since 2004 has come from the incorporation of unemployed workers, a positive, albeit finite, process. As the economy approaches full employment, output growth must converge to potential, which, given labor productivity growth estimates (around 1.5% per annum) and working age population growth, should be in the vicinity of 3% per annum;

• The implications for inflation are straightforward: instead of disinflation we should have the accumulation of inflationary pressures, so far offset by one-off events, which should still play leading roles in 2013;

• If BCB continues waiting the disinflationary bias to materialize, it is likely to be sorely disappointed, but this should not change its monetary policy stance, keeping rates on hold for a long time, probably until the final months of 2013.

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