Strong growth in 2000 sets pace for this year.  According to the National Statistical Institute (IBGE), gross domestic product grew 4.2% last year, the strongest expansion since 1995 and a substantial improvement over the 0.8% growth registered in 1999.  Growth was levelled across all sectors with industry experiencing the strongest growth rate of 4.8%, while services and agriculture grew 3.6% and 2.9% respectively.  However, the data also show that growth in the fourth quarter slowed from the 5.5% annual expansion registered in the third quarter to 4.4% in the fourth quarter.  The slowdown can be attributed principally to a 2.4% contraction in the agricultural sector (forestry -19.6%), since growth in industry and services remained healthy at 4.7% and 4.1% respectively.

Consumers optimistic.  January data indicate that the economy continues to proceed along a favourable growth path.  The downward trend in unemployment and declining interest rates continue to drive consumption growth.  According to the São Paulo Retail Federation (FECESP), retails sales in the São Paulo metropolitan area increased 16.3% in January over the same month in 2000, driven by strong growth in sales of durable consumer goods (+35.2%) and construction materials (+28.6%).  Similarly, the Retail Association of São Paulo (ACSP, Associação Comercial do Estado de São Paulo) reported that retail sales as measured by debit card payments continued to accelerate in February, with sales up 5.8% over February last year.  The most recent GDP data did not yet provide global aggregate demand and supply data but this month’s Consensus Forecast indicates that consumption is likely to have grown at a healthy pace last year and will accelerate in both 2001 and 2002.

Investment picking up.  Investment also seems to have received a strong boost last year, with production of capital goods up 12.9% in December.  Panellists expect that investment expanded strongly in 2000, driven by healthy export growth and the strong industrial output expansion.  The quarterly business confidence index of the Brazilian National Confederation of Industry (CNI), which measures sentiment over current economic conditions and the expectations for the Brazilian economy, rose 3.0% in the fourth quarter of last year.  January data indicate that investment continues to pick up.  Annual capital goods imports were up 4.9% over the same month last year, led by transport equipment and capital goods parts for industry.  Panellists see investment moderating slightly this year but growing at a healthy pace and continuing at a strong growth rate next year.

Positive market sentiment persists.  As a result of the continued acceleration in consumption and investment, growth will be strong in all four quarters this year.  Additionally, the pace is expected to carry over to next year, when growth is seen accelerating further.  Panellist sentiment about next year is also improving as the growth forecast for 2002 was bumped up a notch over last month.

Subdued inflation but Central Bank waits.  The mid-February IBGE-IPCA 15 index, which covers price increases for the first half of the month, increased 0.50%, down from a 0.63% increase in January.  Even though the consumer price index for the São Paulo metropolitan are released by the São Paulo Fundação Instituto de Pesquisas Econômicas (FIPE) confirmed the price moderation in February, the annual rate rose from 4.2% in January to 4.5% in February.   The Consensus expects consumer prices to rise moderately in February, which would raise the annual rate to above the January figure.  Panellists believe that the Central Bank will overshoot the 4.0% inflation target for this year.  Even though significant inflationary pressures remain absent, the Central Bank decided to maintain the benchmark overnight rate (SELIC) at 15.25%, following the 75 and 50 basis point cuts in December and January respectively.  The Central Bank cited lingering concerns about the current trajectory of international oil prices as the key motive behind maintaining current interest rate levels but reiterated its confidence that the fundamentals for reaching this year’s inflation target remain intact.   Reduced inflationary pressures are likely to provide the backdrop for further monetary easing by the Central Bank this year.

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