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Brazil:  External Environment Looms Large

The economy is growing strongly but concerns about the impact of continued Argentine uncertainty, the US downturn and the energy crisis are looming.  A weaker currency is lifting inflationary expectations, which the Brazilian Central Bank has once again addressed by raising its benchmark interest rate.  Further hikes could forestall more pronounced growth this year.

Economic Briefing May 2001                                                                               Archive

Economic growth accelerating.  Key economic releases indicate that the pace of economic activity continued to accelerate in the first quarter of this year.  According to the National Statistical Institute (IBGE) seasonally adjusted industrial production grew 9.6% in March over the same month last year, up from 5.9% in February.  Brazilian businesses continue to expand their investment activity, as capital goods production increased 24.9% over March 2000.  Mechanical, electric and transport equipment output was up 18.9%, 15.4% and 19.6% respectively.  Consumer and intermediate goods production also grew strongly, experiencing 8.3% and 7.0% expansions respectively.  Within consumer goods durables experienced the strongest expansion with 26.5%.  The March survey of the National Confederation of Industry (CNI) shows that industry remains confident about prospects for the second quarter of this year with 57% of the businesses surveyed anticipating sales to increase and another 35% expecting sales to remain stable.  Furthermore, just 5% of the interviewed firms expect to cut back investment with the balance expecting further expansion (49%) or to remain at current levels (44%).  The recent interest rate hikes, however, are likely to have a dampening effect on the current expansion, according to this month’s survey.  In fact, participants expect industrial production growth to remain strong this year but to moderate from from the 6.5% expansion of last year.

The Trade Federation of the State of São Paulo (FCESP) reports that seasonally adjusted retail sales in São Paulo grew 12.0% over the same month last year.  Preliminary March data indicate that retail sales again experienced a strong 18.1% expansion over March 2000.  However, the FCESP consumer confidence index, which is a measure on a scale from zero (highly pessimistic) to 200 (very optimistic), dropped to 113.4 in April from 115.6 in March and 119.9 in February.  The decline in consumer confidence over the first three months of the year was due to a worsening of the perception over economic conditions in light of currency volatility and interest rate hikes.  Nevertheless, consumption is expected to remain healthy this year according to the Consensus Forecast.

Panellists remain optimistic about the growth prospects but voice concerns about the lingering risks posed by Argentina, an uncertain economic outlook in the United States and, more recently, concerns about the potential impact of electricity rationing on economic output.  In fact, the Consensus GDP forecast has been lowered this month over last.  This month’s adjustment is the second consecutive downward revision this year but panellists remain optimistic about growth.  Some participants note that a worsening of the Argentina situation could maintain currency pressures and force the Central Bank to further tighten monetary policy by raising interest rates.  Rising interest rates and further currency deterioration, in turn, would negatively impact fiscal balances via debt servicing costs.  The resulting fiscal adjustments that would be needed to maintain current fiscal targets, when combined with the effect of monetary tightening on consumption and investment, would serve to decelerate growth.

Argentina worries continue to cloud currency.  Lingering uncertainty about Argentina continued to contribute to a further weakening of the Real last month.  In fact, on 25 April, the Real broke the 2.30 to the US$ threshold, a 15.0% depreciation from the end of last year in nominal terms.  Since then, however, the currency has remained weak, closing at 2.27 Real to the US$ on 11 May.  Across the board, panellists have revised their exchange rate forecast to reflect the recent Real weakening.  Nevertheless, this month’s Consensus Forecast indicates that the volatility of the first few months of this year is likely to subside in the coming months with the currency strengthening again by the end of the year but remaining well above the 1.99 Real to the US$ expected at the beginning of this year.


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