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The economy remained in recession in the
first quarter amid high interest rates and tight credit. However, concerns
over inflation are easing, as the currency stabilizes, oil prices come
down gradually and economic activity remains subdued. Therefore, the
Central Bank may cut interest rates in the coming months. The improved
interest rates setting combined with increased global demand are likely to
boost economic activity in the months ahead. |
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First
quarter growth data confirms that industry-induced recession as
consumption remains subdued
Gross domestic product (GDP) shrunk 0.7% in the first quarter over the
same quarter in 2001, which was on par with the 0.7% contraction observed
in the fourth quarter of last year. Thus, the first recession since the
1999 devaluation continued unabated. Industry remained the key driver
behind the first quarter slump with a 3.9% annual contraction. However,
the reading marks an improvement when compared to a 5.5% year-on-year
contraction in the preceding quarter. Within industry, the construction
sector remained in recession with a 8.9% yoy decline in activity (Q4 2001:
-8.3% yoy), followed by manufacturing, which registered a 2.0% drop (Q4
2001: -3.4% yoy). Services registered a slight deterioration, expanding
1.7% compared to 1.8% in the preceding quarter. The moderate growth
experienced in the services sector reflected subdued consumption, as
Brazil continued to suffer from tight credit and the weakening of the
exchange rate. Activity in commerce dropped 4.0% over the first quarter
last year (Q4 2001: -3.3% yoy). In addition, consumers and businesses
alike have still not adjusted to the lifting of energy rationing. As a
result, public utility services output was down 12.2% yoy.
Even though aggregate demand and supply data are not available, additional
data indicate that although consumption remains subdued it is showing
tentative signs of a recovery. According to IBGE, national retail sales
rose 1.0% in March over the same month last year, which was up from the
1.5% annual contraction experienced in February. The Consensus expects
consumption to have dropped 1.4% in the first quarter over the same period
last year, which would be an improvement from the 1.9% contraction in the
final quarter of 2001. After having reached a trough in March, consumption
is likely to pick up towards the end of the year as credit conditions
continue to improve. However, stubbornly high unemployment will remain an
impediment to a sound recovery of consumption this year. In April, open
unemployment rose to 8.2% from 7.8% in March. Consumer expectations also
indicate that consumption is unlikely to experience a strong boost in the
near term. The Index of Consumer Intentions (IIC), released by the São
Paulo Retail Federation (Fecomércio), has experienced successive monthly
growth rates since the beginning of the year but with rates declining. In
May, the positive growth story was interrupted with the index experiencing
a 0.9% decline, as both expectations about current and future conditions
dropped. However, lower interest rates and currency stability may help
bolster consumption this year. The Consensus sees consumption picking up
at a moderate pace this year.
Investment is also likely to have remained in negative territory in the
first quarter of this year, as capital goods imports were down 5.2% in
March over the same period last year. The March reading showed a worsening
in capital good import flows as growth diminished further after having
slowed from a 3.1% expansion in January to 1.1% growth in February.
Similarly, industrial production data show that capital goods output
dropped 1.8% in the first quarter over the same quarter last year.
Continued high interest rates are considered a key impediment for a more
notable investment expansion. Participants expect investment to have
declined 4.8% in Q1, which would be an improvement over the 7.5%
contraction observed in the final quarter of 2001. For the year as a whole,
investment is seen as expanding slightly.
Consensus data indicate that the economy is likely to exit from the
recession in the second quarter with GDP growth picking up. Despite
electoral uncertainty, an improved inflation outlook is anticipated to
give the Central Bank leeway to lower interest rates in the second half of
the year, which will help accelerate growth and lift the annual GDP
expansion.
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