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Energy
concerns cloud economic prospects. Prolonged drought and
capacity shortfalls forced the government to announce a major
energy-rationing programme on 18 May, which seeks to address mounting
concerns about the increased likelihood of power shortages in the coming
months. Brazil is heavily dependent on hydroelectricity, which
accounts for 93.5% power generation. In the drought-stricken region
reservoir levels are currently at 35.0% of capacity. The
government’s plan, which calls for an average 20% cut in energy
consumption from businesses and consumers, principally in the southeast,
central west and northeast of the country, went into effect on 1 June and
will last until 30 November. Users that do not comply with cutbacks
will face hefty penalties on their electricity bills and cuts in power
supplies of up to six days. The electricity rationing is expected to
affect economic activity principally via lower industrial output.
Cement, industrial gas, metals, paper and steel industries will bear the
brunt of the cutbacks as the government has decreed that consumption in
those industries must be lowered by 25%. On the lower end,
automobile, automobile part, beverage, leather, shoe and textile
manufacturers will have to scale back consumption by 15%. If
companies do not comply they will face switch-offs. As a result of
the energy consumption cutbacks, industrial production growth is expected
to slow significantly from the 6.5% observed last year.
Economic
growth moderating. On 15 May, the government released
first quarter Gross Domestic Product (GDP) data, which showed that the
economy grew 3.8% in the first quarter of this year over the same quarter
last year, down from 4.1% year-over-year growth observed in the last
quarter of 2000. The first quarter data surprised on the
downside, since strong consumption and industrial output data indicated a
stronger growth trajectory, and indicates that growth is slowing.
Industry, which registered 5.9% expansion over the first quarter 2000, was
the strongest sector. Within industry, manufacturing and
construction experienced the healthiest expansions of 6.4% and 4.2% over
the same quarter last year. On the downside, services, which
accounted for 58.8% of GDP in 2000, slowed from 3.9% year-over-year growth
in the fourth quarter last year to 2.6% in the first quarter of 2001.
Similarly, agricultural output growth remained subdued with an expansion
of just 1.1% in the first quarter.
Estimates
as to the overall negative impact of the energy rationing on economic
growth currently range from 0.5% – to 1.5% on the downside. While
the full impact of the energy crisis on economic prospects is not yet
reflected fully in this month’s Consensus Forecast, the panellist-specific
data indicate that sentiment has worsened substantially. The
Consensus Forecast expects GDP growth this quarter to remain close to the
level observed in the first quarter this year but to moderate
substantially in the second half. Sentiment about growth prospects
for this year has worsened. Even though the extent of the carryover
of the energy crisis into next year is uncertain, panellists have also
adjusted their forecasts downward by 0.5 percentage points from last
month.
Central
Bank hikes for third time this year. Concerns about
mounting inflationary expectations resulting from the deterioration of the
exchange rate and the domestic energy crisis, prompted the Central Bank to
raise the benchmark SELIC interest rate an additional 50 basis points to
16.75% on 23 May. The May increase was the third consecutive 50
basis points hike since the beginning of the year. Monthly consumer
prices, as measured by the benchmark IPCA index, rose 0.49% through May
15, virtually unchanged from the 0.50% increase reported for the same
period in April.
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