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Brazil:  Trade Balance Deterioration Raises Concerns
The Brazilian economy is set for a year of healthy growth driven by lower interest rates and a pick-up in domestic demand.  The accelerating pace of import growth and the resulting deterioration of the trade balance, however, are raising concerns about the strength of the exchange rate and the ability of the Central Bank to cut interest rates further to bolster economic growth.
Economic Briefing February 2001                                                                       Archive

Economy set for healthy growth this year.  The most recent industrial production data released by the National Statistical Institute (IBGE) indicate that economic activity remained strong through the end of last year.  According to IBGE, seasonally adjusted industrial production grew 6.5% in 2000.  The final result was even a shot above the Consensus figure of 6.2%.  Capital goods production was up 12.4% in 2000, driven by strong output in transport and mechanical equipment, which grew by 19.8% and 17.9% respectively.  Intermediate goods production expanded 6.8%, while consumer goods grew a more moderate 3.3% - despite 21.7% growth in durable consumer goods production.  The National Confederation of Industry (CNI) claims that in January business confidence reached its highest level since July 1998, driven up by optimism about lower interest rates this year and a lessening of concern over the Argentine debt situation.  The Consensus Forecast sees growth moderating this year as a result of a higher comparison base in 2000, but to remain healthy.

Consumption growing strongly.  According to IBGE, unemployment dropped to 4.8% in December, down from 6.2% in November and the lowest level since 1997.  The favourable trend of declining inflation and decreasing interest rates remain the key drivers behind the current healthy consumption growth.  According to the Retail Association of São Paulo (ACSP, Associação Comercial do Estado de São Paulo), retail sales as measured by debit card payments continued to accelerate in January, with growth up 25.0% over January last year.  Data from the Central Bank corroborate the pickup in consumption.  According to the Central Bank’s November consumption data, seasonally adjusted retail sales in the São Paulo metropolitan area grew 9.1% over November 1999.  In addition, the Federação e Centro do Comércio do Estado de São Paulo (FECESP) confirms good prospects for healthy consumption growth this year, stating that consumer confidence rose 10.3% in January over the previous month.

Subdued inflation encourages Central Bank.  According to IBGE, significant inflationary pressures remained absent in January, as consumer prices inched up a 0.57% notch.  The restrained January increase again lowered the annual rate of inflation, which dropped to 5.9%, well above the 4.0% of the Central Bank target for this year.  Panellists expect the downward trend in inflation to persist throughout this year as lower oil prices and a strong harvest are expected to contain price increases.  Encouraged by the favourable inflation outlook, the Central Bank Monetary Policy Committee (COPOM, Comitê de Política Monetária) decided to lower the benchmark overnight rate (SELIC) from 15.75% to 15.25%, following the 75 basis point cut in December.  The decline in inflationary concerns is likely to provide the backdrop for further monetary easing by the Central Bank this year.  In fact, this month’s Consensus Forecast indicates that the SELIC rate is likely to drop further by the end of this year. 

Trade balance remains concern for this year.  The trade balance continued to deteriorate in January driven by strong imports, which increased 40.6% over January 2000.  As a result, the annual trade deficit widened further to US$ 750 million in January.  While exports continue to grow at a healthy pace (up 31.4% from January last year), import growth is now accelerating as consumption picks up and investment rises. 


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