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
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.