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Signs that industrial
activity is bottoming out
According to the National Statistical
Institute (IBGE), industrial production dropped 1.4% in February over the
same month last year, which was down from 1.3% in January and below the
2.0% expected last month by the Consensus. While industrial activity
dropped on an annual basis, it picked up 0.3% over the previous month
according to seasonally adjusted data. The February increase represents
the fourth consecutive monthly increase and indicates that the industry
has left the trough behind. Moreover, firms are beginning to invest
again, as lower interest rates provide for a propitious environment and
domestic demand recovers. In February, capital goods production rose for
the first time since October last year, increasing 4.6% over February
2001. Even though the majority of sectors within industry remained in
negative territory, several sectors experienced strong expansions, led by
tobacco production and pharmaceuticals manufacturing, which rose 42.8% and
21.3% respectively. On the lower end, furniture output and mineral
extraction expanded by 6.4% and 5.0% respectively.
Despite the easing of interest rates in the
first months of this year by the Central Bank, credit remains tight and
energy rationing continues stifle on a more pronounced output expansion.
In addition, the slowdown in exports to neighbouring Argentina as a result
of the demand plunge and devaluation in that country are exerting
additional downside pressure on industrial activity. Last year, 8.6% of
total Brazilian exports were directed to Argentina and exports accounted
for 12.6% of GDP, according to national accounts data. Consensus Forecast
participants expect industry to remain in recession in the first quarter
of this year with output declining 1.4% year-on-year. However, further
easing of energy rationing and a more favourable credit setting should
provide a favourable backdrop for recovery in the second quarter, when
growth is expected to resume. Industry is likely to pick up further in
the second half of the year, which will lift the annual growth rate to
2.4%.
Consumption remains subdued
as tight credit conditions continue to stifle any recovery
According to the São Paulo Retail Federation (FCESP),
real retail sales dropped 7.2% in February over the same month last year,
a worsening from the 5.5% contraction observed in January. Thus, the
trend of depressed consumption observed since April of last year remains
intact as credit conditions continue to be tight and unemployment high
(7.8% in February). Data from IBGE confirm that consumption continues
subdued but at a more moderate pace. The national retail sales volume
dropped 0.9% in February over the same month last year, an improvement
from the 1.1% contraction in January but, nevertheless, a corroboration
that consumption remains weak.
The worst, however, seems to be over and
consumer confidence surveys indicate that consumption is likely to
improve. The FCESP Index of Consumer Intentions (IIC) rose in March but
showed that consumers remain cautious. The March level of the IIC at 98.3
was above the February reading of 97.2 but remains shy of outright
optimism on the IIC scale (zero represents highly pessimistic consumer
sentiment; 200 very optimistic). Nevertheless, the March reading showed
substantial improvement in consumer intentions, as concerns about the
global environment and domestic energy rationing subside. This month’s
Consensus data show that consumption is likely to pick up in the second
quarter - moving into positive territory with 1.2% growth - and will
accelerate further in the second half of the year to lift the annual
expansion to 1.3%, which is up 0.7 percentage points from last month. If
the decline in interest rates of the first three months of this year is
sustained and credit eases, then a more pronounced consumption recovery is
in the making for next year.
Recession persists but end
in sight
Recent data indicate that the recession is
likely to have persisted in the first quarter but may have bottomed out in
February and that economic activity will begin recovering in the coming
months. The Consensus expects the economy to have contracted 0.7% in the
first quarter, worse than the 0.1% contraction experienced in the final
quarter of last year but 0.3 percentage points above last month’s
forecast. However, growth is anticipated to resume by the second quarter
with activity increasing 1.2% over the same quarter in 2001. Healthy
recovery in the second half of year will boost the annual growth rate to
2.2%. The rebound will continue next year with GDP forecast to grow 3.5%.
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