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Brazil - Economic Briefing February 2002

Favourable Inflation Prospects Likely to Permit Monetary Easing

Prospects for increased exchange rate stability, lower oil prices and fiscal discipline are likely to provide for a more favourable inflationary setting this year. As a result, the Central Bank is expect to gradually lower interest rates, which should serve to boost domestic economic activity already strengthened by the easing of energy rationing.

External sector growth and a domestic demand rebound to boost economy

Even though domestic demand growth slowed as a result of higher interest rates, tighter credit conditions and nationwide energy rationing, the external sector continued to perform favourably.  While year-end data are not yet available, consumption and investment related data continued to confirm the downward trend in domestic demand at the end of the year.  According to the São Paulo State Retail Federation (FCESP, Federação do Comércio do Estado de São Paulo), retail sales in the São Paulo metropolitan region declined 5.5% in December year-on-year compared to a 3.7% increase in November. 


Nevertheless, the outlook for consumption is improving.  According to FCESP, the consumer confidence index increased for the third consecutive month in January as both current consumption and future expectations picked up.  The FCESP survey indicates that consumers are beginning to confide in the economy’s ability to withstand further domestic and external shocks as those induced by energy rationing and the Argentina crisis.  The trend to lower unemployment – the unemployment rate reported by IBGE dropped from 6.8% in November to 6.4% in December - should serve to further boost consumption this year.  In fact, Consensus Forecast panellists anticipate consumption to remain subdued throughout the first half of this year but to rebound strongly in the second half, lifting the annual growth rate to 2.3%, which is up from 1.0% in last month’s edition.


The positive growth trend observed in investment over the past months seems to have come to a halt in the last quarter of 2001.  In December, capital goods production in industry slowed further with seasonally adjusted output dropping for the fourth consecutive month.  Capital goods production, however, remained strong with a 12.7% expansion in 2001, driven principally by healthy growth in agricultural, electrical generation and transport equipment output.  Nevertheless, the declining trend in capital goods production and a notable drop in construction activity are likely to have lowered investment growth substantially in the last quarter of 2001.  As a result, annual investment growth is expected to have slowed to 3.9% in 2001 from 4.5% in 2000.  Despite the pick up in domestic demand, participants expect investment to slow further this year with growth dropping to 2.2%.


According to this month’s Consensus Forecast, export growth is likely to remain strong this year, despite the subdued outlook for the international economy, persistent downward pressure on key Brazilian export commodities prices and the increased competitiveness of Argentine products in the wake of the devaluation.  Exports are anticipated to expand this year but at a lower rate than the 5.7% growth registered in 2001.  Import growth will pick up moderately from the 0.4% contraction experienced in 2001.  As a result, the annual trade surplus is seen as widening from US$ 2.7 billion in 2001.


The favourable prospects for a consumption pickup and continued strength in the external sector are expected to lift economic activity this year from 1.7% growth last year.  Growth is expected to remain subdued in the first half with output declining in the first quarter and registering just modest growth in the second quarter.  However, a healthy expansion in the third and fourth quarter respectively will help boost growth by year-end.


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