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Inflationary pressures abating but target still remote
The mid-August consumer price index (IBGE-IPCA 15), which covers monthly
price increases up to the 15th of every month, rose 0.27% over July. The
August data came in slightly above the 0.18% monthly decline observed in
July but confirmed the moderation in monthly price increases observed
since May. As a result of the more benign price developments observed in
August, the annual inflation rate dropped for the third consecutive month
from 15.7% in July to 14.8% in August. The Central Bank continues to
believe that this year’s annual inflation target of 8.5% is achievable but
agree that current market expectations indicate that compliance is
increasingly unlikely. In fact, Consensus Forecast participants believe
that annual inflation will reach 10.1%, which is down 0.6 percentage
points from last month but still well above monetary authorities’ target
for this year. Furthermore, the likely pick-up in economic activity next
year and prospects for more accelerated currency depreciation are likely
to raise price pressures. As a result, year-end inflation is expected to
reach 6.7%, which is down 0.2 percentage points from last month’s forecast
but exceeds the Central Bank target of 5.5%.
Government presents 2004 budget
On 28 August, the government presented its 2004 budget proposal. The
government’s budget foresees total spending of 299.6 billion reais (US$
93.6 billion), which represents a nominal increase over this year of
13.1%. Finance officials expect the consolidated public sector primary
surplus to be 4.25% of GDP in 2004, which is unchanged from this year. The
government’s macroeconomic assumptions are somewhat more optimistic than
the current Consensus, particularly in terms of growth and exchange rate
movements next year, which is reflected in differing estimates for the
non-financial fiscal deficit, which the Consensus Forecast sees at 3.1% of
GDP compared to the government’s 2.3% of GDP estimate.
Annual
current account surplus widens significantly in second quarter
In the second quarter, the current account balance registered a surplus of
US$ 404 million. The second quarter figure was well above the US$ 131
million surplus observed in the first quarter and contrasted notably with
the US$ 5.2 billion deficit observed in the second quarter of 2002. As a
result, the annual current account balance rose to a US$ 1.3 billion
surplus in the second quarter. The reversion of the current account to a
surplus from a deficit is mainly attributable to the growing trade
surplus, which reached US$ 6.6 billion in the second quarter, up from US$
3.8 billion in the first quarter. Strong export growth of 36.4% in the
second quarter over the same quarter last year drove the trade balance
into a surplus, as imports contracted 2.0% over the same period,
reflecting the subdued domestic economy. Similarly, the capital and
financial account recorded a US$ 5.6 billion surplus in the second
quarter, exceeding the US$ 4.5 billion surplus observed in the preceding
quarter but well below the US$ 9.6 billion surplus for the same quarter
last year. Participants expect the current account surplus to revert back
to a deficit in the second half of the year and to grow to a US$ 2.2
billion deficit by year-end. More accelerated import growth resulting from
the pick up in domestic economic activity is likely to reduce the trade
surplus, which will contribute to a further widening of the current
account deficit, which is seen closing 2004 at US$ 6.2 billion.
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