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Brazil - Economic Briefing March 2002

Central Bank Eases Despite Looming Inflation Concerns

Prospects for a more stable currency this year and a moderation of domestic price pressures in recent months, prompted the Central Bank to lower the benchmark interest rate in a controversial decision that reflected a lack of unanimity among board members. While the monetary easing is likely to serve to bolster the economy– currently in recession –any volatility in the exchange rate resulting from a persistence of Argentina contagion is likely to raise inflationary expectations and thus threaten the viability of monetary easing.

Slowdown in final quarter confirmed as industry slows further amidst rationing

Fourth quarter gross domestic product (GDP) data confirmed that the economy entered into recession in the final quarter last year.  GDP contracted 0.1% over the same quarter the year before, which was down from 0.5% growth registered in the third quarter but slightly more favourable than the 0.3% contraction expected by the Consensus in last month’s publication.  The final quarter figure brought down annual growth in 2001 to 1.5%, a substantial slowdown when compared to the 4.4% growth rate registered in 2000.  Last year’s deceleration was prompted principally by a 0.6% contraction in industrial activity, as firms were required to cut back output as a result of the energy rationing programme adopted in the first half of last year.  Meanwhile, both agricultural activity and services remained in positive territory with growth rates of 5.1% and 2.5% respectively.  Within industry, construction experienced the strongest contraction in the third quarter of 8.3% over the same quarter in 2000, down from a 2.7% drop year-on-year in the third quarter.  Mining dropped by 4.1% (-2.3% yoy in Q3) and manufacturing output declined 3.4% (-0.3% yoy in Q3).  Fourth quarter activity in the services sector received a strong boost from the communications sector, where growth reached a healthy 10.3%.  Nevertheless, activity slowed to +1.8 yoy growth from 2.1% in the third quarter.


Even though aggregate demand and supply data have not yet been released, proxy indicators show that domestic demand dropped off notably towards the end of the last year.  According to IBGE, national retail sales dropped 2.4% in December over the same month in 2000, following a 1.9% decline in November.  The December figure brought the annual contraction in retail sales to 1.3%.  Consensus data show that consumption is likely to have dropped 2.4% in the final quarter of last year over the same quarter in 2000, following a 2.1% drop in the third quarter.  Nevertheless, the sound growth registered in the first half of 2001 is likely to have bolstered the annual growth rate to a modest 0.8%.  Even so, last year’s consumption data indicate that high interest rates, deterioration in the exchange rate and tighter credit conditions restrained consumption growth, since the annual rate remained well below the solid 5.6% expansion registered in 2000.


Investment also seems to have slowed in the final quarter of last year as the negative growth trend in capital goods output that began in September persisted through the end of the year.  Capital goods production dropped 3.5% in December over the same month the year before, the first contraction observed in 22 months.  Double digit growth rates in the first eight months of the year, however, managed to boost the annual growth rate in capital goods production, which remained at a healthy 12.7% in 2001.  Trade data confirm the downward trend in investment towards the end of the year.  According to the Ministry of Development, Industry and Trade, capital goods imports dropped by 21.9% in December over the same month in 2000, which was down significantly from the 5.4% contraction recorded in November.  Nevertheless, Consensus participants see investment growth to have remained in positive territory last year with a growth rate of 2.9%, compared to 4.5% growth in 2000. 


Panellists expect the economic slowdown to persist through the first quarter of this year.  However, economic growth will resume in the second quarter and pick up notably in the second half of the year.  The acceleration in the second part of this year will help lift the annual growth rate, as the declining interest rate setting and an improved export environment provide a backdrop for recovery.  This month’s Consensus figure for growth this year is down notch over last month’s publication but still remains 0.3 percentage points above the growth rate expected in December of last year.



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