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The economic slowdown is bottoming out
and signs of improvement are emerging. However, a fuel price induced
pickup in inflation is likely to cut short any efforts of the Central Bank
to lower interest rates in the short-term to propel the economy forward,
as declining exports to Argentina promise to keep industrial output more
subdued than originally anticipated. |
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Economy
remains in trough as consumption remains suppressed
In March, real retail sales declined 1.5% compared to the same period last
year. The March figure represented an improvement compared to the 5.5% and
7.7% contractions observed in January and February respectively. According
to the São Paulo Retail Federation (Fecomércio), high interest rates, a
loss of consumer purchasing power resulting from currency depreciation,
higher unemployment levels and increased insolvency are key elements
behind the continued slump in consumption. The outlook for consumption,
however, is improving. The Fecomércio Index of Consumer Intentions (IIC)
rose by 0.6% in April, up from the 0.4% decrease registered in March.
Monetary easing and an improved credit environment is likely to boost
consumption later in the year. In fact, panellists expect growth to pick
up at a faster pace in the second half of the year and to lift the
consumption expansion to 2.1% for the year as a whole.
Industrial engine sputtering amidst tight credit and lower demand
According to seasonally adjusted data from the National Statistical
Institute (IBGE), industrial production dropped 0.8% in March over
February. The March reading represented the first monthly contraction
observed since October 2001. On an annual basis, industrial output
contracted 3.8% compared to 1.3% registered in February. Government
officials attribute the continued slump in industrial activity to the drop
in exports to Argentina. Last year, 8.0% of total Brazilian exports were
directed to Argentina of which 92.5% were of industrial origin. Therefore,
the industrial sector is likely to continue to grow below potential as
long as the Argentine crisis persists. Nevertheless, the improved
international setting may help offset some of the regional export growth
constraints. In fact, Consensus participants are confident that industry
is likely to begin entering positive growth territory in the second
quarter, with growth picking up further in the second half amid lower
interest rates.
Government lowers growth forecast as export prospects worsen
On 6 May, the government reduced its forecast for Gross Domestic Product (GDP)
growth this year to 2.0% from 2.5% earlier. Officials claim that the
persistence of the Argentina crisis is likely to slow the export engine
this year, while concerns about higher inflation may stifle the Central
Bank’s ability to lower interest rates as much as anticipated earlier in
order to boost domestic economic activity. The Consensus remains more
optimistic about growth prospects, expecting the economy to expand at a
more favourable rate, as moderate growth in the first half is offset by a
strong rebound in the second half when the anticipated rebound of the
global economy is seen to compensate for plummeting demand of Argentina.
Central
Bank raises inflation forecast as higher oil prices loom
In its 17 April meeting, the Central Bank board decided to raise its
inflation forecast for this year, as concerns about higher oil prices and
utility costs loom. The April consumer price index (IBGE-IPCA) increased
0.8% over March, when consumer prices rose 0.6%. The April increase was
the strongest monthly uptick this year and raised the annual inflation
rate to 7.8% from 7.5% in March. As a result of the less favourable
inflation environment, monetary officials now expect inflation to reach
4.5% by the end of this year, which is up from the 3.7% targeted earlier
this year. The new figure is at the upper end of the current inflation
rate target between 4.0% and 4.5%. The decision to raise the official
inflation forecast clearly indicates that monetary authorities are
unlikely to lower interest rates for the time being. A surprise February
lowering of the benchmark SELIC interest rate from 18.75% to 18.50% had
raised optimism over more aggressive rate cuts this year. Participants
have raised the inflation forecast for this year by 0.1 percentage points
and have bumped up their year-end interest rate forecast accordingly by
0.2 percentage points since last month.
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