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In order to stem the inflationary pass-through
of last year’s currency deterioration, monetary officials had to keep the
reins tight. High interest rates and diminished real incomes have sent
domestic demand in a tailspin and the external sector currently remains
the only driving force behind economic growth. However, uncertain
prospects over the global economy threaten to choke off the only economic
growth driver, unless the recent exchange rate appreciation helps lower
inflationary expectations and enables monetary officials to adopt a more
growth accommodating monetary policy. |
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Growth
slows in the first quarter amid slump in domestic demand
In the first quarter, gross domestic product (GDP) expanded 2.0% over the
same quarter last year. The first quarter figure represented a slowdown
over the previous quarter when growth reached 3.4% and was on target with
the Consensus figure of last month. Moreover, the first quarter reading
was inflated by seasonal factors since this year’s first quarter counted
more working days than last year’s. On a seasonally adjusted basis,
economic activity declined 0.1% over the fourth quarter last year – the
first such drop observed since the second quarter 2002.
External sector still favoured by more competitive exchange rate
The external sector represented the key driving force behind the first
quarter growth, as the domestic economy slumped. Exports were up 20.2% in
the first quarter over the same quarter last year, which was only slightly
down from the 20.4% spike observed in the previous quarter. Imports
remained in negative territory with a 4.7% contraction (Q4 02: -8.8%). The
domestic side of the economy deteriorated notably compared to the fourth
quarter. Investment declined 1.5% year-on-year (Q4 02: +4.2% yoy) and
consumption dropped 1.8% (Q4 02: -0.2%), amid a notable decline in private
consumption, which dropped off 2.3% over the same quarter last year (Q4
02: -0.4%). The current slump in domestic economic activity can be
attributed to the current high interest rate setting and continued fallout
from the real income deterioration associated with the exchange rate
weakening last year.
Agriculture strongest sector as soy harvest boosted
The agricultural sector exhibited the strongest first quarter growth rate,
with activity up 8.6% over the same quarter last year. The strong
performance was attributed principally to favourable developments in soy
output. In addition to agriculture, public utility services and mining
activities registered strong expansions of 5.7% and 4.8% respectively over
the first quarter 2002. On the downside, the transportation and
construction sectors experienced drops in activity with output declining
5.1% and 1.7% respectively year-on-year.
Tight
monetary policy and rising inflation key impediments to economic
acceleration
High interest rates and tight credit are likely to remain key impediments
to a rapid recovery in the domestic economy. The recent strengthening in
the currency may serve to ease rising inflationary expectations, which
could enable the Central Bank to ease the monetary reins to spur economic
growth. However, a stronger currency also erases some of the
competitiveness gained in the wake of the depreciation. Thus, an
acceleration economic activity is unlikely to emerge with growth seen as
slowing further throughout the year. Consensus Forecast panellists have
lowered their projection for 2003 GDP growth a notch since last month. The
moderate growth path is expected to be left behind next year, as lower
interest rates and the external sector promise to drive economic activity
upward. As a result, participants expect economic growth to accelerate to
3.0%.
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