Why Brazil's Lula May Tack Toward the Center

barely two years ago for corruption and money laundering. Investors had been frightened when this left wing populist was elected the first time around. Now they seem to be relieved. But what happens next? Maria Eloisa Carburero in Brazilia has an on the ground report in a few minutes. But first I thought we should talk about the US mid term elections on November eight, which you'd think would be heavily influenced by what's happening in the US economy, but

maybe not. Let's talk it all through with Bloomberg Chief US Economists and A Wong and Bloomberg's White House reporter Nancy Cook. Now, Anna, we have every congressional seat and a third of the seats in the Senate up for grabs in this election. Before we get to how the economy has or has not changed the race in different parts of the country, I guess you should just paint a scene for US. Inflation is obviously the highest we've seen in many years in the US, but it's not

a straightforward um sort of economic crisis story. Im in the US is not in recession. We're not seeing a big rising unemployment. So so how's the economy looking? Well, First of all, people feel very gloomy about the future, But if you look at the fundamentals, such as the actual spending, how much people have in the bank account, UM jobs out there, the actual labor income growth for the past twelve months, it's actually better than UM many many years, for decades, in fact, the best in a

couple of decades. And the reason why people feel gloomier than the fundamentals would predict that they would feel it is because of inflation. And I know research on people's psychology is not strong suit of economists, but sociologists and other fields have shown that people just feel like they're cheated whenever inflation is high, Right, you even if your nominal income rise at the same pace as inflation. People just feel cheated when inflation is eroding their nominal income.

I guess we should just clarify because there has been I mean, I know Larry Summons has talked about how most people's real wages have been going down even though the nominal is high. So for for a big chunk of the workforce, I guess it wages are not quite keeping up with inflation, or you would say if they are keeping up well, I would say for the lower income household, we see that nominal income growth at the bottom quartile of workers are actually catching up with inflation.

The wage growth was at ten or eleven percent at the bottom of the workers. So for those workers, I would say their real income is catching up to you know, actually has been positive over the past twelve months. Be for the top half of the workers, I would say that the real real wage has been declining over the past twelve months. So, and Nancy, we heard from an on paper, although we have this high inflation, we do

have still an extremely low unemployment rate. Incomes have either been keeping up with inflation or almost keeping up with inflation. You've paid a lot of attention to to these campaigns and how the White House has been dealing with them. How how would you what's been more salient on the campaign trail, inflation, jobs, or other things entirely like the

change in the abortion rules. So we've seen lately in poll after poll, voters um are really saying that the most dominant issue to them and the one that they plan to vote on is a combination of the economy and inflation. In the closing weeks of this campaign, inflation

has really become the dominant issue. I would say over the summer, Democrats were very hopeful actually, and they felt like their messages on abortion rights, threats to democracy, what they saw as extremism on the part of Republicans in terms of some of their policy proposals. Democrats really felt like that would help them potentially stave off much larger losses in the midterms. So you know, historically the party in power always loses some seats in the mid terms.

But I think Democrats in July and August really felt much more optimistic. You've seen a real sea change. It's altading in September, I would say, uh into October, where Democrats are starting to grow much more pessimistic. The economy has become the main issue. Gas prices have fluctuated and

that has definitely hurt people's perception of the economy. And another thing that we've seen is the housing market in the US has started to cool as the FED keeps raising interest rates, and so that is also affecting people, and the White House is aware that that. You know, while some economists believe inflation has peaked, things like food prices and also the prices for you know, housing have remained high, and those are really what the majority of

Americans spend their money on. And so even if you have you know, some wonky White House economist on TV saying, look, we think inflation has peaked, that doesn't necessarily mean that these key voters that the White House needs to win over, like women, suburban women, independence, that's a message that they're going to be receptive to if they're seeing high prices at the grocery store, fluctuating gas prices, and like maybe

let's say their rent has gone up a lot. I do remember when various attempts earlier in the year by President Biden to talk about the putin price hike and too blame President putin for high inflation. That hasn't really stuck, right, I mean, have Republicans successfully been able to blame the Biden administration for high inflation. The Republicans are trying to make this election a report card on President Biden and

his leadership of the economy. What the White House has been trying to do is make this, particularly lately into a choice between the two parties. And they're trying to say, you know, look, we understand inflation is high, but we're doing all these things. You know, We've released u of Danas,

strategic released from the Strategic Petroleum Reserve. We passed this sweeping legislation in August that's meant to bring down inflation and control some prices, particularly for seniors on prescription drugs. The inflation reduction exactly many people another country sounded a bit silly, but anyway, well it was branded with the elections in mind. Um. But and what they're trying to

say is like, look at the things we've done. We know that you're in pain but with the high prices, but we've tried to do all these things and we're doing everything we can. And by the way, the White House says, you know, inflation is really the purview of the Federal Reserve, And what they're trying to say is if Republicans control things again like Congress, they don't have

a plan to cover inflation. Meanwhile, Republicans just keep sort of bringing up things that are happening every day, like the everyday costs, and they're really hammering the White House on this, and they have just had a great amount of success in recent weeks sort of driving the inflation economy message home, combined with a renew focus on crime. There's a lot of crime in American cities now, and I think that those are messages that are really speaking

to voters doing mid terms. That you can have very different campaigns in different parts of the country for specific Senate seats or or even specific congressional seats. So are our economic geographical economic differences playing into different kinds of campaigns. They certainly are. And you see also different candidates trying to tail their tailor their message to different voting groups.

So for instance, um, you know, Bloomberg Economics did this great thing called the Misery Index, which looks at where Americans are most miserable, and so what we've seen in the Midwest part of the country. Uh, you know, the combination of sort of inflation and employment is not as bad. But in other places where there are key Senate races, like Arizona and Nevada, the misery index is very high.

And so, for instance, in Arizona, we've seen the Democratic candidate there, Mark Kelly, really try to tailor his message and steer clear of Biden. You know, Biden has not gone anywhere near Arizona and really try to tailor his message to the huge number of Latino voters that Democrats are trying to woo, who polsters tell me have been very concerned about inflation, and so he is trying to talk to that group specifically. We've seen in Nevada Democrats

really trying to turn out to union forces. There's a you know, a bunch of the casino workers are unionized, so they're really trying to speak to those groups and and appear friendly to labor um and speak to those

people about high prices. But again President Biden has steered clear of Nevada too, So so it's an interesting thing where the economy is being experienced differently in different states of the country, and each Senate race is sort of its own little microcosm of what is happening in the economy and what those themes are. Well, Anna Wong, that's

a there's a good segue to you. I guess you should remind us what the misery indexes, and I think also remind us of this discussion that we've had I think in the past about how how you can it could potentially be that that higher inflation is more politically damaging than high unemployment because of the larger number of people that affects. Yeah, So misery index is the sum of unimployed i'm in rate and the inflation rate. And whereas unemployment uh as I mean, as Stephanie said, unemployment

um affect only a small portion of the population. Inflation is felt by every household, and in fact, in the lower income household who spent a higher share of their

budget on gasoline and food, they feel it more. And to Nancy's point about the geographic distant distribution of this misery that's being felt differently in this country, we have found, based on misery index at state level, that the Red States misery was higher and in fact worsened more under the Biden years than during the Trump years, and it is a very clear trend, and that could explain why Red states are the voters here are more passionate about

UM going out to the vote. And the reason why missoury has worsened in Red state it's more so than the Blue States, was because the Red States never really locked down as hard as the Blue States. So they're there, their local economy was already growing at sort of capacity before UM everybody opened up right then after everybody opened up that and with the American Rescue Act, the inflation impulse further hit these Red states more because they were

operating close to capacity even before. Hence we see that Red States has generally higher inflation than Blue states. You know, you've been that really ahead of the game, ahead of many other forecasters this year, not only in predicting where that Federal Reserve interest rate was going to go, way ahead of anyone else, expecting that to maybe get as high as five, but also expecting inflation to go higher

for longer than many expected. So two years time general election, what what do your forecast say is the economy that President Biden potentially will be trying to get re election on. So our base cases for the for a recession to begin in the third quarter of so by November four

I would predict that economy would be gradually improving. But given that my forecast is also for the FED to only begin to cut rates in perhaps around you know, springtime, at the economy would only be in the nascent stage of turning around. Unemployment would be at five percent at that point. It will be pretty bad for Biden's election campaign. So, Nancy, we have now kind of been started to look into

the future. So tell us what's your best guess of the election outcome, the mid term election outcome, and briefly what that might mean for US economic policy making over the next couple of years. So I've talked to a bunch of posters and Democratic strategies this week, and there is sort of a wide concert says that Democrats will lose the House. It's just a matter of by how wide of a margin. Um. A lot of people think that the Democrats it. The Senate is a little bit

more unclear, um. But I think if they have divided government, even if Republicans just control the House, it means that there will be very little economic policy making within the Biden White House. There won't be any big legislative sweeping packages. And what typically happens in year three and four of a presidency if there's divided government is that the economic policy making is really relegated to just regulatory stuff, so

things done out of agencies, rules being rewritten. The president will turn much more to foreign policy, and perhaps there'll be some things done on some international economic issues. Um he can continue to talk about the Chips Act. Maybe they will do something on trade, although they've been very reluctant to do anything on the Chinese tariffs. But those will really be the areas that I will be looking for. I don't think there will be much happening out of

the White House and the domestic economic France. We don't know whether it will be good news for America's but it's bad news for people covering US economic policy. Nancy

Cook and Anna Wong, thank you so much. Now, Even by US standards, the battle for the Brazilian presidency was brutal, almost certainly the toughest contest in Brazil's forty odd years of democracy, and the margin of victory was small, just under two percentage points, but two percent of the vote in Brazil equates to two million extra votes cast for Lula, and despite some complaints about fraud in the electoral system and demonstrations on the streets by supporters of the now

outgoing president Jao Boltonaro, it looks like two million votes is going to be enough to secure a peaceful transfer of power. But what kind of economy does president elect Lula inherit? Does he have the team the resources to deliver on his promises. Here's Maria Eloisa Caporo in Brazilia M M. Louise in Ala da Silva. Lula, as Brazilians known him, is returning to the presidency after two prior terms in office. In geology two thousand's the intervening years

having colorful to say the least. He spent more than a year in jail for accusations of his involvement in a corruption scheme known as car was Wash, and his presidential campaign was tighter than expected, with supporters of incumbent Jairbelsonao a majority in Congress. But Lula has promised vertier times health and his supporters are hopeful he'll deliver. Here's some of them singing one of the most famous campaign slogans. Just after Rula was declared president with fifty point nine

percent of the books. The next four years are in charge of challenges. Latin America's largest economy will face lower growth, high interest rates, and persistent inflation. Here's Unstravisia held Latin American economists at City Group. It's never good news when the fat heights rates for emerging markets. So Brazila will be facing head winds going into next year with lower commodity prices, tighter financial conditions, and as lower as lower global growth in China, in Europe and in the US.

We're forecasting relatively low growth for all of Latin America, but for in particular for breast in three. This is Gabriella, a self declared Bolsonado support I talked to at a coffee shop in Brazilia prior to election j We are so eclusive e Columbia. The economy is one of the things that I think about the most when I cast my vote. I'm an independent worker and I need the

economy to perform well. Only now after the pandemic, we are seeing that there's an economic bounce back, and I fear that things will change in the economy, could stall. I'm here would who was working at a clothing store in the Southwest neighborhood of Brazilia. Today prior to elections, are they going you see? Politics are an embarrassment this year. Really, I've never seen anything like this, and this impacts businesses. I'm really worried about unemployment and security. There's a lot

of people going hungry and without jobs. No stray. Interest rates in Brazil at at the highest since two thousand seventeen. Central bankers were ahead of the curve and raised interest rates in the wake of the pandemic. Last September, they stopped an eighteen months long tiding cycle, which took rates to thirteen point seventy five. Inflation fell from earlier this year to forecast of five point six percent by December. But it wasn't monetary policy that helped hold price increases.

It was tax cuts, temporary tax cuts that lower transportation costs, including gasoline, and most of them are set to expire by the end of the year. He's Roberto Zazamski, brazilianalysts at Vartes. So we have seen a significant decline and headline inflation. In fact, we experienced three months of deflation in Brazil between July and September, but now in October

we already started to see monthly prices rising again. So when you look at what we call co inflation that basically focus on the less volatile prices in the economy, that measure continues to be quite high and it will take longer for them to improve. Brazil's economy has proven resilient to high interest rates. Many Brazilians are concerned of

what comes next for the economy. Sa Samski Divarkle's analysts expects the nation's economy to grow by just one percent next year, down from two points seven percent, and the big question is how the government will respond to persist in inflation. Here's five Amendous, a doorman in the southwest neighborhood of Rassilia. Economy. May God bless whoever wins, because the economy is really weak. It's not performing as it should. I worry about prices of food, gasoline and cooking gas.

We'll see what the next president does and if he manages to lower prices, because if not, we won't even have enough to eat. And then there's all the complained promises that need funding. That's Lula in an event in the city of Jewist you Porda speaking to a crowd of supporters before election day, he's promising to raise minimum wages so they match inflation. During the campaign trail, he also promised to cut taxas for those with the lowest income.

He promised object reform that will increase taxes on the regist and he promised paytricks to the poor of six hundred eyes, which is about a hundred and sixteen U S dollars. But the now elected president hasn't said how all of that will be financed. Resist public that has risen through most of the past decade and is now the highest among the major emerging markets, what investors need from the government is some sort of reassurance, that is,

that will be paid back at some point. Here's Adriana Upita, Brazil economist at Bloomberg Economics. The big problem for Brazil right now is that none of its fixical rules is credible. Governments from the right and the left political spectrum have circumvented each of these rules. So the first question for the new presidential mandate it's to propose a new, credible,

enforceable and feasible fiscal group. The second second question is to make sure that the counter can fund the many promises made on the campaign trail, especially on social aid and incomplex cuts. Latin America has seen a wave of products erupt as governments have failed to deliver the promises of helping easy the pain of high inflation and low growth. So it's not just the market but Brazilians themselves who will be looking at how Lunar navigates the challenge of

increasing social aid while keeping Brazil's death levels stable. And they are likely to keep tabs on their new president, who could come under pressure if he doesn't fulfill all those promises he made on the campaign trail. For Bloomber News, this is my yellow so I'm delighted to talk a bit more about the prospects for Brazil with Richard Back, who's head of political analysis and strategy at XP Investimentos

in Brazil. Um, but I should say he's joining me from a mountaintop in what is a public holiday in Brazil. So thank you very much for having this having this conversation with me on your on your day off, Richard. It's been a busy week, I know, and we've had quite a lot of uncertainty at various times over whether the current president, John Bersnaro had actually admitted defeat. So I guess could you just give us an update on where things stand. Sure, yeah, good afternoon. It is a

pleasure to talk to you today. Um, you know, Lulas is getting some kind of short vacations from today until Sunday, So I'm really happy with this. So I could come to this hunting and take a breath for a couple of days and then we'll be back. He's on he's on the beach. Yes, that's this very nice place I recommend. And but yeah, we we are living these days after the elections that Bosonaro half recognized the result of the election. But we're seeing this role being blocked by boson narvistic

truck drivers and militants from his cause. And um, yeah, I think it works in a coordinated way because Bosonaro was delaying to talk to to make a first speech after the elections because he was hoping that people will go to the streets and make protests in favor of him and then he could be politically stronger than he is right now. But the other side of this, this coin is if people doesn't go and they are not

going in this multitude that he was hoping. Um, he will be in a weak situation and very isolated by the establishment in Brazil, media, political establishment, judiciary establishments. They are just leaving Boston, Nario. So, um, this I don't think this is will work in a good way for him, But I think it's done. What I'm saying to our clients since uh, the last month, I think think seems

since September is I think we are forecasting this. You know, truck drivers, people in the streets, protesting, but we never we never took this as a real threat to democracy in Brazil. So this is the thing that democracy can support. I'm not saying they should support, but can support. And um, it is happening. But I think that the end is

one week, two weeks we were free from this thing. Yes, so you can have demonstrations on the street, but that doesn't necessarily mean a real challenge to the rule of law or to the police. Full transfer of power. And just to remind us, when would that transfer of power happen? When would when would president elect I guess Lula become president again? Yeah again the third time. Um, this is these two moments, one moment in December, maybe December tenth.

It is a date that supermanatural court defines in December when they give him a kind of certificate that he won the elections. So and then this first moment official and the second moment is generally the one when you have officially the new president it is constitutional, you have officially the new president becoming president, working in the office officially, and the Congress in Brazil one month after that is generally is February the one. What kind of constraints do

you see on him? And of course there's a lot of people hoping that he can achieve great things and be focusing on the poorest in society and other things that he's been sort of known for. Is he going to be very constru train and what he can do? Yes,

he will. I think he will have the same constraints that also Naro faced in the last four years UH in this this more ideological agenda in terms of behavior especially Butsonar you couldn't approve a lot of things in the right wing side and Lula would not approve a lot of things from the left wing side. Agenda. I think he will have a majority in Congress, UH, like two hundred seventy congressmen in the House, like a forty

congressman UH, senators in in Senate. It is very, very very easy to see the numbers in favor of Lula UH. Not a big majority, but majority in both houses. But it doesn't mean he will do anything he wants. He cannot be his own party administration. He knows that he will have to bring more people and will have to deal with the Congress and the judiciary, because this is a mess, the situation that judiciary is in Brazil today.

So he's saying this is positive that he knows that he cannot be a radical or revengeful against the institutions because he can be removed from from the presidency as Tuma was in the past. He nominated Arguming, his vice president of very conservative men Um, for the coordination of the process of transition, which is a very good sign because he could nominate someone from his own party. So he is opening this thing a little bit because it doesn't mean much, but he knows and he reads Lula

very well. Does kind of signals that he has to give to the society. So he's doing that from a distance. It looks surprising, you know, when Lula was first elected and here's this left wing firebrand, former trade unionist and metal worker. Um I seem to remember, investors and the financial markets were pretty worried. And yet this result, uh of his his winning the presidency seems to have gone

down reasonably well. So so briefly, how would you how would you describe the reaction of kind of international investors to this result and what is it that that investors

are thinking when they look at Lula. It was interesting because since the last year, um, after the opening, the general opening, and uh, finally we could travel to the US and the UK and make contact with the personally with our clients and investors in Brazil, and they were more more comfortable with Lula winning the elections before the Brazilians. So the foreigners, they were more comfortable with this this thing. Yeah,

we know Lula. He will make distortions, but he's not a guy that will blow everything and make a very red government, red administration, left wing orientated. During the campaign, we haven't this this volatility that many people were expecting during the elections, you know in the markets in Brazil, because you know, you know, the investors in Brazil they used to say, we know already know the good part and the best part of both of these guys, Lula

and Bosonardo. So we've have seen the wars from Lula and the best from Lula, the wars from Bosonaro, the good part of Bossonaro. So not that surprising situation, right, that's interesting. And finally, I mean for the region and for the sort of broader economy, do you think it's

good news to have Lula reelected? And we are in a very difficult situation for the global economy, lots of emerging market economies dealing with a stronger dollar, which traditionally is quite a bad thing, and also rising interest rates by the Federal Reserve. We've been talking earlier in the show about the the US interest rates that's in the past often been a recipe for for crises in places

like Brazil. Um. But we also have some possible pluses and advantages coming to South America from the fact that the US is sort of distancing itself and potentially decoupling from from it some of its trade relationships with China. So just a Lula presidency make it more likely that Brazil will come through this in relatively good health and maybe to see some opportunities from the current state of affairs.

I think so um, they diagnosis that his party and people and his inner circle is getting more matured, because he was scaring me personally because six months ago when you asked them about the foreign situation, they fed all that stuff. He wasn't in their political or economical calculations, you know, and he was kind of surprised for them. So you at this point, I was looking at a Wow, this is this is weird. You know, they should be

aware about that. But they are increasing this understanding that the foreign situation Asian can be not good for Brazio. So but but Lula, he he's already doing better in this foreign relationship, uh than Bosonaro because Bossonaro he's not very fond of this international negotiations and Bluela he loves that thing, you know, he loves to be loved. So he uh and Macron they have a very good relationship. I'm pretty sure that he will meet with Mr Joe

Biden before even being the office. In terms of negotiations, I think Lula has advantage in terms of reading the scenario, acting according to the scenario. I think Bossonaro has a better team than Lula can nominate. That's interesting. So right now the sort of economic expertise would would still favor

the current the current president. But if what you're standing in the international community means anything at all, President Lula is going to be better off as not least because he's he's going to go off and be the hero at the cop meetings I see in in Egypt. So many concerns globally about what was going to happen to the Brazilian the rainforest if if President Boltonaro stayed in power. Richard Bach, and thank you so much for doing this on your day off. We really appreciate you coming on.

Thank you very much. Thank you for the dpication. That's it for Stephonomics. I have no idea what we're going to talk about next week, but check out the Bloomberg News website for more economic news and views on the global economy, and follow at economics on Twitter. This episode was produced by Sammer, Sadi Young Young and Magnus Hendrickson, with special thanks to Eloisa, Maria, Richard Bach, Nancy Cook, and Anna wat. Mike Sasso is the executive producer of Stephonomics four