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Brazil:  Growth Rebounding Strongly
The Brazilian economy continues to exhibit healthy growth prospects for this year driven by a robust external sector and accelerating domestic demand.  Declining interest rates and a favourable inflation scenario are likely to fuel the economic rebound and further incite foreign investor interest. 
Economic Briefing August 2000                                                                           Archive

Healthy growth in second quarter.  At the beginning of August, the National Statistical Institute (IBGE) released second quarter Gross Domestic Product (GDP) data, which indicates that the economy expanded by 3.9% over the same quarter in 1999.  The second quarter figure was slightly above the 3.8% forecasted by participants in last month's survey and represents the third consecutive quarter of positive expansion rates.  Agriculture performed strongly with an 8.8% year-over-year expansion, driven primarily by favourable climatic conditions.  Industry grew by a more modest 4.3% rate, while services experienced 3.1% growth.  Industry benefited from high production levels in mining and high investment in communications, which grew by 9.9% and 15.6% respectively.  Furthermore, the manufacturing industry profited from the favourable export conditions with growth reaching 5.5% following a 3.1% contraction in the first quarter. 

Key economic indicators confirm that the economy continues to proceed along a favourable growth trajectory.  According to IGBE, seasonally adjusted industrial production rose 7.4% in June over the same month last year.  The breakdown of industrial production by category of use clearly illustrates that businesses have resumed their investment activities.  Capital goods production expanded by a strong 11.0%, while intermediate goods output rose 8.6% over the same month in 1999.  Domestic demand is only recovering more gradually.  Thus, consumer goods production grew at a moderate 2.7%.

Interest rates drop amid lower inflationary expectations.  In its mid-July meeting, the Central Bank Monetary Policy Committee (COPOM, Comité de Política Monetaria) unexpectedly lowered the benchmark overnight rate (SELIC) for the fourth time this year from 17.0% to 16.5%.  The Central Bank's move reflected a diminished concern about inflationary pressures resulting from high oil prices and increased confidence that a further Fed hike this year is likely to be limited to 25 rather then the originally expected 50 basis points.  Furthermore, the Central Bank appears to have moved away from its more cautious interest rate policy of earlier in the year to a laxer attitude seeking to facilitate the favourable growth trajectory for this year. 

Inflation experiences a short-term spike.  In July, most of the key price indices registered a strong monthly uptick as a result of hikes in public utility tariffs and fuel price adjustments by the government.  Additional upward price pressures resulted from cold weather that hiked clothing prices.  According to the most recent inflation data from IBGE, consumer prices rose by 6.3% in July over the same month last year.  The 1.4% monthly increase was the highest since January 1996 but has not altered participant's expectations for inflation this year.  The favourable downward trend in inflation is likely to persist through next year with prices increasing slightly above the Central Bank's target of 4.0% for 2001.


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