Growth slows further in the
third quarter on energy rationing and higher interest rates
In the third quarter, Gross Domestic Product
(GDP) grew just 0.3% over the same quarter last year, down from 4.5% and
1.8% in the first and second quarters of this year respectively.
Nevertheless, the third quarter growth rate came in a notch above last
Consensus Forecast figure of 0.2%.
Key behind the third quarter slowdown was the
cutback in production that the domestic industry had to undergo in order
to abide by the government-imposed energy rationing programme. The effects
of the energy crisis were exacerbated by higher interest rates, resulting
from the Central Bank's attempts to stem pressure on the Real since June.
Industrial activity fell for the first time in two years, shrinking by
1.3% year-on-year. Within industry, public utilities and construction
activity accounted for the lion share of the decline, experiencing a 12.1%
and 2.1% contraction respectively.
The 3.5% year-on-year growth in agricultural
activity in the third quarter helped offset a more pronounced decline in
GDP. Services stayed in positive territory but the 1.5% expansion in the
third quarter is well below the 2.7% growth rate registered in the second
quarter. The communications sector recovered from a contraction in the
second quarter and expanded strongly (+10.5% year-on-year), thus,
partially compensating for weaker commerce (-2.4% yoy) and financial
services (-0.7%) activity.
Investment and consumption
declining amidst tighter credit environment
Even though IBGE has not yet released
aggregate supply and demand data recent indicators show that both
consumption and investment are likely to have experienced downturns.
According to IBGE's industrial production data, annual growth in capital
goods production slowed from 14.2% in August to just 3.5% in September
over the same period last year. Trade data confirm an investment
slowdown, as imports of capital goods in September fell 10.4% over the
same month last year, down from 4.4% growth in the prior month.
Similarly, consumption is also likely to have
slowed. According to the Retail Federation of the State of São Paulo (FCESP,
Federação e Centro do Comércio do Estado de São Paulo), retail sales
dropped 10.0% in October over the same month last year, a slight
improvement from the 11.8% contraction observed in September but,
nevertheless, a confirmation that consumption remains very weak, due to
the tighter credit environment.
Growth slump likely to
persist through end of year
recent data releases confirm that the slowdown is likely to persist into
the final quarter of this year. According to the Economic Research
Institute (FIPE, Fundação Instituto de Pesquisas Econômicas), the monthly
indicator of economic activity (IMEC), which monitors economic activity in
São Paulo, dropped 2.5% in October over the same month last year,
following upon a 0.1% contraction in September. The October contraction
was the second decline experienced since the end of 1999. The key
consumption-related indicator of the IMEC dropped 4.9%, while electricity
consumption plummeted 22.3% over October last year.
Even though the currency rebounded strongly in
November, interest rates are unlikely to fall in the near future, as long
as uncertainty in Argentina overshadows exchange rate stability and
inflationary prospects. Therefore, even if energy rationing is eased next
year, tighter credit is likely to remain a strong impediment to a speedy
rebound from the current growth slump.
Consensus Forecast participants
have maintained their growth forecast for this year. The current
slowdown is anticipated to continue with the economy entering into
recession in the current quarter and remaining in a slump through the
first half of next year.
Thereafter, the anticipated pick-up in the
global economy, declining interest rates and prospects for an easing of
current energy rationing in the latter half of 2002 should serve to boost
the economy. Nevertheless, the economic expansion for the year will
remain subdued with growth reaching just 1.9%. The prospects for an
economic upswing are unlikely to depend heavily on Argentine developments,
since market participants at this point have priced some form of Argentine
collapse into their risk assessments and are likely to focus increasingly
on domestic developments, such as the strengthening of fiscal balances and
the execution of the remaining structural reforms. The recent Real
strengthening confirms that investors are increasingly viewing Brazil in a
more favourable light.