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Brazil - Economic Briefing April 2002

Economy Bottoming Out But Inflation Worries Persist

Recession is likely to have bottomed out in the first quarter of this year and an easing of energy rationing and lower interest rates could provide a push to economic recovery. However, rising oil prices loom heavy and may forestall further monetary easing from the Central Bank for the time being.

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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