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Amid the favourable trend of increased
capital flows to emerging markets, the real has strengthened notably in
recent months, brining the currency to levels observed just prior to the
politically-induced deterioration last year. The currency appreciation
could ease mounting inflationary pressures throughout the year, enabling
the Central Bank to loosen monetary reins and help bring the economy back
on track. |
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Export
sector bolsters economy as domestic demand growth below potential
Data from São Paulo, the country’s main metropolitan area where most
economic activity is concentrated, suggest that the Brazilian economic
activity remains subdued but is beginning to show signs of improvement.
According to the Economic Research Institute (FIPE, Fundação Instituto de
Pesquisas Econômicas), economic activity in São Paulo, as measured by the
monthly indicator of economic activity (IMEC, Indicador de Movimentação
Econômica), dropped 2.1% in March over the same month last year, a modest
improvement from the 3.6% contraction in February. According to seasonally
adjusted data, output dropped 0.5% over February. The decline in real
incomes resulting from the currency depreciation last year along with
tight credit conditions are holding a recovery in domestic demand at bay,
as consumption remains subdued and investments are postponed for the time
being.
Consumption subdued amid currency induced real income deterioration
The National Statistical Office (IBGE) reports that national retail sales
in February dropped 2.0%, following a 4.4% contraction in January. Strong
declines in the volume of fuel and supermarket sales of 6.5% and 5.1%
respectively over the same month last year were only partially offset by
higher clothing and household items sales, which rose 5.7% and 5.1%
respectively.
Export
engine revved up as result of more competitive exchange
The export sector with the help of a more competitive exchange rate is
currently the main engine behind the economy. In April, annualised exports
were up 13.1% over the same month last year. Imports in turn remained in
negative territory with a 7.8% contraction, as domestic demand remains
subdued. The main beneficiaries of the current favourable export setting
are the industrial and agricultural sectors where growth remains very
robust. According to IBGE, industrial output rose 2.6% in March, over the
same month last year, which was down from 3.2% the prior month. Similarly,
the National Statistical Institute reports that in March, favourable
climate conditions and a strong harvest have improved the outlook for the
agricultural sector, which will boost output by 17.0% this year.
Agricultural and livestock exports in April experienced strong growth
compared to last year, particularly soy related products, beef and
chicken.
Growth
outlook modest as export expansion could ebb
Participants see domestic demand remaining subdued through the first half
of the year amid tighter credit conditions and higher interest rates.
However, the rebound in the currency and prospects for lower interest
rates in the second half of the year would bolster economic activity. The
pickup will remain subdued, however.
Currency strengthens in line with regional trend
Similar to other regional currencies, the real appreciated notably in
April, strengthening by 16.0% in nominal terms to the US$. The April
appreciation followed upon a more moderate 6.2% gain in March. The real
has now appreciated 22.3% since the end of last year. The rebound in the
currency reflects not only a recovery in investor confidence about the
Lula administration’s continued commitment to economic policy transparency
but also a generalized rebound in international investor interest in
emerging market assets. In addition to the strengthening in the exchange
rate, the stock market rebounded 11.4% in April (+9.7% in March), while
the spread to US Treasuries of the benchmark composite J.P. Morgan EMBI+
Brazilian sovereign bond dropped to 811 - its lowest level observed since
May of last year. The government took advantage of the favourable market
conditions on 29 April and issued its first global bond for US$ 1.0
billion. However, participants do not expect the current strengthening
trend to persist and anticipate the currency to depreciate from the
current 2.88 reais to the US$ by the end of the year.
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