The currency depreciation observed in recent months has stabilized but
the resulting rise in consumer prices has prompted the Central Bank to
maintain interest rates at high levels. Tighter monetary policy, combined
with energy rationing, has led to a pronounced downturn in economic
activity as both consumption and investment are showing notable signs of a
Economic prospects taking turn for worse.
The slowdown in economic activity observed in the second quarter of this
year, when growth decelerated to just 1.8% over the same quarter last
year, is likely to have persisted through the third quarter of this year.
According to the São Paulo Retail Federation (FCESP), real retail sales
dropped 13.0% in August over the same month last year, a slight
improvement from the 13.8% contraction observed in July. However, the
trend of an accelerated drop in real retail sales observed since April of
this year, when the contraction was 3.1%, remains intact. Data for Brazil
from the National Statistical Institute (IBGE) confirm the downturn in
consumption but at a more moderate pace. According to IBGE, the volume of
retail sales dropped 0.3% in August over the same month last year, an
improvement from the 3.9% contraction in July, nevertheless a
corroboration that consumption remains in negative territory. This
month’s Consensus data show that consumption will moderate further through
the end of the year. Declining interest rates are likely to provide some
impetus to a consumption recovery next year but growth will remain subdued.
Key investment indicators do not yet
unanimously confirm the slowdown in domestic and international demand.
According to the most recent IBGE data, industrial production of capital
goods rose just 3.5% in September over the same month last year, a very
sudden drop compared to the strong 16.1% and 14.2% growth rates in July
and August respectively. However, the Ministry of Industrial Development
and Trade October data indicate that investment continued to expand
strongly, as capital goods imports rose by 5.4% in October over the same
month last year, up from the 10.4% contraction experienced in September.
Annualised imports of capital goods remained at healthy 15.9% above the
levels in October 2000, down only modestly from 16.0% in September.
Nevertheless, this month’s Consensus Forecast expects investment to slow
substantially through the end of the year.
Industrial production slowing.
According to the IBGE industrial production survey, output fell 1.7% in
September over the same month last year, the third contraction this year
and down from a 0.3% drop in August. Key behind the slowdown was a 3.3%
contraction in intermediate goods production and a 0.6% drop in consumer
goods (durable consumer goods: -10.3%) output over the same month last
year. Capital goods production did not contract but experienced a notable
slowdown (see above for details). On a seasonally adjusted basis
industrial output dropped 0.3% in September over August, confirming the
negative trend of monthly contractions observed since the beginning of the
year. Industry continues to suffer the consequences of energy rationing
but increasingly also of decreased domestic and international demand.
Growth outlook revised downward further.
Prospects for a more pronounced global slowdown are likely to put further
pressure on the export sector. As a result, participants expect the
economic deceleration to persist through the end of the year. The GDP
growth forecast for this year has been maintained but is down 1.2
percentage points from just 90 days ago. Forecasts for next year have
registered a downward adjustment from 2.1% in last month’s publication.