Brazil - Economic Briefing December 2003

 Central Bank Continues Monetary Policy Easing to Stimulate Economy

The economy is mired in recession. Consumption and investment remain subdued and only exports are providing a buffer from more pronounced contractions in economic activity. Meanwhile, monetary authorities continue to ease their stance amid the declining inflationary trend. The rapid reduction in interest rates promises to rekindle the ailing economy, which is set to experience a solid rebound next year.

Recession deepens in third quarter amid domestic demand slump
In the third quarter, gross domestic product (GDP) contracted 1.5% over the same quarter last year, which was well below market expectations. The third quarter figure represented the third consecutive quarterly deceleration and was down from the 1.1% decline observed in the second quarter. Nevertheless, in seasonally adjusted terms GDP actually grew 0.4 over the second quarter, an improvement from the 1.2% drop registered in the prior quarter.

Export growth slows but still positive contribution
Lagging domestic demand was the key drive behind the slump in the third quarter. Private consumption declined 3.7% over the same quarter last year (Q2: -6.0% year-on-year), while public consumption expanded a modest 0.9% (Q2: -1.1% yoy). As a result, total consumption declined 2.6% in the third quarter compared to the third quarter 2002. Investment activity plummeted 9.1% over the same period (Q2: -10.5% yoy). Exports remained the only buffer against a more pronounced economic contraction, with growth of 3.7% over the same quarter last year (Q2: +29.9% yoy), while imports dropped 5.5% (Q2: +6.0% yoy). The slowdown in export growth can be attributed principally to the continued currency appreciation this year.

Construction suffers from high credit costs but mining profits from demand in China and Europe
On a sectoral basis, agriculture experienced the strongest drop in activity with a 2.8% decline over the same quarter last year (Q2: +7.3% yoy), followed by industry with a 1.6% contraction (Q2: -3.5% yoy) and services with a 0.8% downturn (Q2: -0.3% yoy). Within industry, the construction sector registered a staggering 10.9% decline in activity in the third quarter (Q2: -11.0% yoy). In addition, in the services sector, the recession in wholesale and retail commerce deepened further, with activity dropping 6.0% over the same quarter last year (Q2: -3.7% yoy). The strongest positive growth rates were observed in mining and public utility services, where activity was up 2.6% and 1.5% respectively over the same quarter in 2002.

This year, higher credit costs, rising unemployment and deteriorating real incomes have severely undermined economic activity. The recovery of industrial production and retail sales observed in September indicate that a nascent recovery at the end of the year may be in the making. In fact, Consensus Forecast participants see the economy as entering positive growth territory in the final quarter of the year with GDP expanding an annual 1.6%. The moderate growth pace, however, will be insufficient to lift the annual growth rate significantly, as the Consensus expects economic activity for the year as a whole to rise only 0.4%, down another 0.2 percentage points from last month. Next year, export growth is anticipated by Consensus participants to moderate but the lower interest rate setting and a stronger currency are likely to give a boost to the domestic economy. As a result, economic activity is expected to grow 3.5%, which is up 0.2 percentage points from last month’s forecast and on target with the government’s estimates for 2004.