Seasonally adjusted data further indicate that the June decline was driven by a 2.1% drop in intermediate goods output over May and a 1.8% decrease in consumer goods production (durable consumer goods: -5.9%), while capital goods production dropped a more moderate 0.1%.  Industrial production forecasts have again experienced a downward revision, dropping 0.5 percentage points over last month to 2.7%.  Forecasts for next year have also been revised downward but a more moderate 0.2 percentage points to 3.5%.  Retail sales data from the Federation of the State of São Paulo (FCESP) indicate that consumption is also slowing.  FCESP reports that retail sales dropped 6.6% in June over the same month last year, down from 2.8% growth registered in May. 

Consensus Forecast participants have undertaken significant revisions to their forecasts, reflecting the anticipated downturn in economic activity in the second half of the year.  Economic growth is expected to have remained healthy in the second quarter but is expected to decelerate in the third and fourth quarter.  As a result, annual growth projections for this year have been lowered 0.1 percentage points, which is roughly in line with the government’s new growth projection.  Panellists, however, remain a bit more sceptical than the government about the scale of the growth pickup next year.

External accounts deteriorating.  Central Bank data indicate that the annual current account deficit increased to 4.9% of GDP (US$ 26.8 billion) in the first half of 2001, compared to 4.3% of GDP in June last year.  The deterioration in the current account deficit can be attributed principally to the shift in the trade balance from a US$ 126 million surplus in the first half of last year to a US$ 1.6 billion deficit.  Strong export growth of 11.9% for the same period was outpaced by more accelerated import growth (+15.3%) resulting from stronger domestic demand.  To date, the rising current account gap has not been a major concern, as ample foreign direct investments sufficiently financed the imbalance.  However, external accounts data for the first half of this year show that annual foreign direct investment dropped 9.6% over the same period last year, while portfolio investment dropped 53.1% for the same period.  Some panellists suggest that FDI inflows, which registered a record level of US$ 30.5 billion in 2000, could drop to as low as US$ 17 billion in 2001.  Concerns about the ability of Brazil to finance a growing current account deficit without further jeopardizing growth, particularly in the face of the lower capital inflows resulting from the Argentina crisis, are likely to be alleviated by the IMF support package.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Brazil.  For more details please click here.

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