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Industrial
activity remains robust as exports favoured
Industrial production rose 4.1% in February over the same month last year,
which was up from the 2.7% rate observed in January. In seasonally
adjusted terms industrial output rose 0.7% over January, which was up from
0.6% in the prior month. Robust growth in tobacco (+13.6% year-on-year),
mechanical equipment (+11.9% yoy), transport equipment (+11.6% yoy) and
leather goods production (+11.3% yoy) bolstered output in February. On the
downside, pharmaceuticals output and textile production dropped 5.5% and
5.0% respectively over the same month last year. The government claimed
that the healthy February rate was in part influenced by a weak comparison
base last year but that stronger exports, amid the more competitive
exchange rate, also served to drive up February output growth.
Domestic demand lagging amid high interest rates and weaker exchange rate
Last year’s deterioration in the exchange rate and the corresponding
decline in real income, along with tight credit conditions and higher
interest rates are beginning to show in domestic economic activity.
Current domestic demand indicators do not point to a clear trend.
According to the Economic Research Institute (FIPE, Fundação Instituto de
Pesquisas Econômicas), the monthly indicator of economic activity (IMEC,
Indicador de Movimentação Econômica), which monitors economic activity in
São Paulo, declined 3.6% in February over the same month last year,
following upon a 2.6% contraction in January. However, the data is
distorted in part by seasonal factors. According to seasonally adjusted
data, the economy added 1.7% over January, when monthly activity had
dropped 0.1%. The key consumption-related indicator of the IMEC showed a
similar pattern with activity dropping 3.6% over February last year but
accelerating in seasonally adjusted terms to 1.7% over January (-3.8%).
However, investment does appear to be slowing. According to IBGE's
industrial production data, capital goods production rose a moderate 0.1%
in February over the same month last year, which was down from 2.3% in
January. Similarly, trade data confirm a moderation in investment
activity, as annualised capital goods imports in February were down 20.2%
over the same month last year, a slight improvement over the 21.9% decline
observed in January.
Participants anticipate the rate of economic activity to accelerate only
moderately this year compared to 2002 amid the less favourable interest
rate setting and uncertainty about the trajectory of the international
economy. Furthermore, even though economic growth should gain speed next
year, the expected growth rate is modest when compared with other
countries in the region.
Currency strengthening resumes
The real resumed its strengthening trend in March, following a brief
weakening in February. The currency appreciated 6.2% to the US$ in nominal
terms over February, a substantial strengthening when compared with the
1.0% depreciation observed in the prior month. As a result, the currency
closed at 3.35 reais to the US$ at the end of March – the strongest level
observed in six months. Increased investor confidence about the likelihood
of a short war in Iraq reversed the generalized sell-off in emerging
market assets observed in February. In addition to the strengthening in
the exchange rate, the stock market rebounded 9.7% in March, while the
spread to US Treasuries of the benchmark composite J.P. Morgan EMBI+
Brazilian sovereign bond dropped to 1,059 - its lowest level observed
since June of last year. The improvement in the foreign currency and
capital markets reflects the fact that the feared investor flight to safe
havens in the wake of a military conflict did not realize. The government
has confirmed its commitment to the current floating exchange rate regime
and promises to refrain from exerting pressure on monetary authorities to
intervene in the currency markets if the strengthening threatens to choke
off the current expansion in the export sector. Participants now actually
anticipate that the real will appreciate this year over 2002, with the
currency seen 1.9% stronger. Next year, however, the exchange rate is seen
as encountering renewed pressures.
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